SOLUTIONS MANUAL
THE LEGAL AND REGULATORY ENVIRONMENT OF BUSINESS 19TH EDITION BY MARISA PAGNATTARO, DANIEL CAHOY, JULIE MANNING MAJID, PETER SHED (CHAPTER 1_22) SOLUTIONS MANUAL Chapter 1 Law as a Foundation for Business Learning Objectives The purpose of this chapter is to introduce the students to the subject of law and to some classifications of its subject matter. In addition, it is designed to instill in them respect for the role of the ―rule of law‖ in the society and that the judicial system is the most important stabilizing force in society. It should create an awareness that law is a foundation for the private market and ―property‖ as a legal concept underpins that market and contributes to the maximum wealth of nations through productivity. This chapter also describes stare decisis, basic sources of the American law, and sanctions that can be imposed when the law is not followed.
References
Bethell, Tom, The Noblest Triumph (1999). Bernstein, William J., The First of Plenty. McGraw-Hill (2004). Driegel, Blandine, The State and the Rule of Law. Princeton U. Press (1995). Friedman, Lawrence M., American Law, 2d ed. Norton (1998). Harnett, Bertram, Law, Lawyers and Laymen: Making Sense of the American Legal System. San Diego: Harcourt Brace Jovanovich (1984). Helpman, Elhanan, The Mystery of Economic Growth. Belknap Press (2004). Holmes, The Common Law. Little, Brown and Company (1922). Kelman, M., A Guide to Critical Legal Studies. Harvard (1988). Pound, An Introduction to the Philosophy of Law. Yale University Press (1922). Reed, O. Lee, ―Law, the Rule of Law, and Property,‖ American Business Law Journal, Vol. 38 (2001). Reed, O. Lee, ―Nationbuilding 101: Reductionism in Property, Liberty, and Corporate Governance,‖ 36 Vanderbilt Journal of Transitional Law 673 (2003). The Spirit of the Common Law. Marshall Jones Co. (1921).
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Teaching Outline I. Introduction A. Why Law and Regulations Are Fundamental Foundations for Business (LO 1-1) Emphasize: That by studying the legal and regulatory environment of business, students will gain an understanding of basic legal vocabulary and gain the ability to identify problematic situations that could result in liability. That because of the positive role lawyers can play, they are increasingly being asked to join corporate boards. Sidebar 1.1 titled ‗Sustainability and Integrity: Cautionary Tales of Legal Liability.‘ II. Law, the Rule of Law, and Property A. Law Emphasize: The simple definition of law. It can be elaborated by observing that law is a rule-based, state-enforced formal ordering system with moral elements. That adequate law and legal institutes promote the certainty and trust necessary for complex, long-term business arrangements. In an economic sense, they lower the costs of transacting business. Additional Matters for Discussion: Discuss that law formalizes values and traditions and that law is more needed in a large, heterogeneous modern nation than in a smaller, homogeneous nation. Compare the U.S. and Japan. It is not too early in this chapter to ask students whether or not lack of law and strict regulation facilitated the economic crash and recession that began in 2008. Ask students to comment on how mistrust of law and lawmakers precipitated the ―Occupy Wall Street‖ and other ―Occupy…‖ movements that arose in 2011. Discuss how the law impacts the COVID 19 restrictions on businesses opening in 2020. B. The Rule of Law Emphasize: That under a rule of law, laws are generally and equally applicable. That lack of the rule of law internationally has produced hundreds of calls for it in the 1-2
last several years by business and political leaders. Get students to search for rule-oflaw references in computer databases. That the complete rule of law is an ideal rather than a fact in even the most democratic societies.
Additional Matters for Discussion: Get students to discuss why the managing director of J.P. Morgan and Co. called the rule of law ―a cornerstone of free trade.‖ Ask students why the rule of law tends to produce rules that benefit everyone. Answer: Because laws apply generally and equally to everyone, the only way lawmakers can benefit themselves is by benefitting everyone. This answer is theoretical, of course. Lawmakers are often benefited individually for making laws that favor special interests. Ask students to imagine how society would be with no laws. What if the governor of one‘s state announced that tomorrow would be no-law day and that nothing would be penalized or enforced, no police would be present and no penalties would result from anyone‘s actions. What would the students do? One is likely to find that after a few fleeting and whimsical thoughts, they would agree that they would primarily act to protect their real and personal property. C. Property (LO 1-2) Emphasize: The two meanings of property. That property is not the resource or thing itself. It is a right (or series of rights). That the property right gives a major incentive to develop resources. That the exclusionary right of property provides a basis for the private market and modern business. Additional Matters for Discussion: Ask students to discuss the incentive to grow and prosper and the incentive to innovate and progress under a system with a right to private property ownership and a communist system where private ownership of property is greatly diminished for most. Would they even be in school if accumulation of property rights were not attainable? D. Property in its Broadest Sense Emphasize: How in its broadest sense ―property‖ is the central concept of Western legal systems. How property can be thought of as the hub of a wheel and the various legal topics studied in the text as spokes of the wheel. Law and the rule of law provide the unifying 1-3
rim of the wheel. (Refer to Figure 1.1) That for Madison and other constitutional framers, property protected not only physical resources like land but also human rights like freedom of speech, freedom of religion, and freedom from unreasonable intrusion by the government.
Additional Matters for Discussion: Ask students to discuss the statement: ―Bill Gates and your professor have equal property.‖ The point is to examine the confusion between ―resources‖ and ―property.‖ Arguably, although Bill Gates and the student may have vastly different amounts of resources, he and the student have exactly the same right to these respective resources, thus the same ―property.‖ In Federalist Paper 10, Madison wrote: ―Property… in its particular application means that ‗domination which one man claims and exercises over the external things of the world, in exclusion of every other individual.‘ In its larger and juster meaning, it embraces everything to which a man may attach a value and have a right; and which leaves to everyone else a like advantage. In the former sense, a man‘s land, or merchandise, or money is called his property. In the latter sense, a man has property in his opinions and the free communication of them. He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them. He has property very dear to him in the safety and liberty of his person. He has an equal property in the free use of his faculties and free choice of the objects on which to employ them. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.‖ Madison‘s ―larger and juster meaning‖ of property opens up all sorts of opportunities for discussion with students. Note that although a system of property is basic to private business in the modern nation, it does not preclude redistribution of resources for education, health, and relief of poverty and adversity, etc. Even as the American revolutionaries maintained ―no taxation (of our individual resources) without representation,‖ they appreciated the necessity of appropriate taxation (of one‘s resources) with democratic representation. The importance of the broader sense of private property in the common law grows out of the Magna Carta. From the 13th through the 18th centuries, the importance of private property created constitutional tension between the English monarchs and their subjects. The monarchs often claimed in essence that they owned the nation, its land, and its produce, yet in opposition to this there was a growing sense that people owned things privately and could be taxed on this private ownership only through their own representative consent. Thus, the British colonists in the new world claimed they could not be taxed without representation. The Sons of liberty, one of the first revolutionary groups, had as their slogan ―Liberty, Property, and no Stamps.‖
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E. Jurisprudence Emphasize: The various schools of jurisprudence. How the various schools of jurisprudence overlap. That the word jurisprudence also refers to the general body of law interpreted by judges as opposed to legislation. II. Classifications of Law A. Common Law and Civil Law (LO 1-3) Emphasize: That the ―common law‖ countries are those that were colonized by England and take the legal approach of that nation. That common law emerged as judge-made law and even today emphasizes the importance of judges in the legal system. That civil law relies on the legislation rather than judicial decisions to determine what the law is. Under civil law, courts are primarily fact-finding bodies. B. Public and Private Law Emphasize: The distinction between public and private law. That constitutional law, administrative law, and criminal law are three of the main sources of public law. That property law, contract law, and tort law are three of the main types of private law. C. Civil Law and Criminal Law Emphasize: That for administrative purposes, courts usually separate criminal actions from all other lawsuits. That civil law as a classification of law is not the same as civil law as discussed previously as a system of law. The context of the term‘s use must be considered when defining the term. Sidebar 1.4 titled ―Goldman Sachs: ‗Rogue‘ Bankers and a $1 Billion Legal Charge‖ D. Substantive Law and Procedural Law
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Emphasize: The distinction between substantive and procedural laws. That substantive rules of law define rights and duties, while procedural rules of law provide the machinery for enforcing those rights and duties. IV. Sources of Law (LO 1-4) A. Federal Law Emphasize: That federal law is a very important source of law. It includes the U.S. Constitution, which is the supreme law of the nation. That any law, federal or state, that conflicts with the Constitution is said to be void and has no legal effect. That next in the hierarchy of federal law comes the legislation passed by Congress, also called ―acts‖ or ―statutes‖ (collections of legislation, often on the same subject, are codes). B. State Law Emphasize: The distinction between a statute, a code, and an ordinance. The benefits of uniform legislation and especially the Uniform Commercial Code. Additional Matter for Discussion: The problem of clear, concise, and accurate statutory drafting. Have the students write a definition for a law prohibiting ―conduct unbecoming a student.‖ C. Judicial Decisions or Case Law Emphasize: How a judicial opinion becomes a precedent and how a case is cited. The distinction between a holding of a case that establishes precedent and dicta. Additional Matters for Discussion: Discuss how in America‘s property-based legal system, resolving disputes over the meaning and application of the law is imperative. Judicial decision-making formally resolves disputes. Talk about the need to have impartial judges. Have the students express their views on originalism. Do they think that originalism can be fair and effective over 200 years after a document was drafted? 1-6
Advantages Emphasize: The importance of stare decisis. The advantages of stare decisis. Disadvantages Emphasize: That the disadvantages of case law include volume of cases, conflicting precedents, dicta, rejection of precedent, and conflicts of law. The problem of conflict of laws and the attempts at resolution. Additional Matters for Discussion: Discuss how a wrongly decided case can create bad precedent (such as Plessy v. Ferguson, and how the Court corrected it in Brown v. Board of Education).
D. Sources of Law Hierarchy in Review Emphasize: That law comes in a hierarchy. Law higher in the hierarchy overrules or preempts lower law. E. Legal Sanctions Emphasize: That sanctions are necessary to encourage or force compliance with the law. That the Fourteenth Amendment mandates that individuals receive due process. That the right of an individual to take another person‘s resources (especially money) because that person has failed to meet the requirements of the law (e.g., the breach of a contract) is known as a remedy. F. Sanctions for Criminal Conduct Emphasize: That criminal actions may result in one or more of the five sanctions listed. That the purposes of sanctions are to protect the public and deter further criminal conduct. 1-7
The distinction between felonies and misdemeanors.
Additional Matters for Discussion: Draw attention to the fact that as society changes, criminal law changes. Point out that miscegenation and homosexuality were both once considered crimes. Have the students debate whether or not certain actions that are now criminal should be. For example, drug use, alcoholism, gambling, and prostitution. The growth of ―white collar‖ crime such as income tax evasion, embezzlement, bribery of foreign officials, computer fraud, and price fixing. Have the students discuss appropriate punishment for those convicted. That Chapter 13 will cover criminal law in detail. G. Sanctions for Breach of Contract Emphasize: The importance of contract law to the business community. That when one party to a contract fails to do what he or she agreed to do, a breach of contract occurs. That the usual remedy for a breach is a suit for dollar damages. These damages, called compensatory damages, are awarded to make the victim of the breach ―whole‖ in the economic sense. That in addition to compensatory damages, breach-of-contract cases may award consequential damages in some circumstances. That in some circumstances, the remedy of an injured party may be a decree of specific performance—an order by the court commanding the other party actually to perform a bargain as agreed. Additional Matter for Discussion: That contracts will be discussed in detail in chapters 8 and 9. H. Sanctions for Tortious Conduct Emphasize: That a tort is a civil wrong other than a breach of contract. The theory of damages in tort cases. That there are three types of torts: intentional, negligence, and strict liability. That punitive damages—also called exemplary damages—are also appropriate when the tort is intentional or the unreasonable conduct is extremely severe. Additional Matter for Discussion: 1-8
That tort law will be discussed in detail in chapter 10.
I. Sanctions for Violating Statutes and Regulations Emphasize: That statutes at both the federal and state levels of government impose a variety of sanctions for violating the statutes or regulations of administrative agencies adopted to accomplish statutory purposes. That most statutes include provisions for the imposition of fines and penalties. That the sanctions imposed for violating statutes or administrative agency regulations are an important part of enforcing the property-based legal system. Additional Matter for Discussion: Review the Concept Summary pertaining to Legal Sanctions. V. Property and Corporate Governance Emphasize: That under the rule of law in a property-based legal system, all persons have an equal right to their resources. That corporations are owned by shareholders but controlled by the boards they elect and the managers that the boards appoint. A. The Specific Sense of Corporate Governance Emphasize: That corporate governance defines the legal relationship between corporate agents like managers or boards of directors and the shareholder owners of the corporation. That due to the complexity of modern corporations, there are sometimes breakdowns in corporate governance. That corporate governance can fail even when corporate managers do nothing illegal. B. The General Sense of Corporate Governance Emphasize: That in a larger sense corporate governance includes the legal property relations that large businesses have with each other, with their customers, and with society. That most chapters of the text deal with corporate governance, at least in the larger sense. How the economic crash of 2008 was in part caused by lack of adequate corporate 1-9
governance. Additional Matter for Discussion: That corporate governance will be discussed in detail in chapter 14.
Answers to Review Questions and Problems Introduction 1.
Why Nations are Economically Weak or Strong? a. b.
Answer should discuss dependency theory, natural resources, education, technology, the private market, and the legal system. A ―proper‖ legal system that is adequately enforced.
Law, the Rule of Law, and Property 2.
Law a.
b.
3.
The Rule of Law a.
b.
4.
Law is a series of rules laid down by the state and backed up by enforcement. Both law and custom maintain order in society, but law is more formal and easier to change, whereas custom usually precedes law. The role that courts and policy play in the legal system include enforcement, application, and interpretation.
A system of law defined by generally and equally applicable rules. The general and equal application of rules differentiates the rule of law from law as the commands of the state. The rule of law is ―an ideal rather than a complete fact‖ because lawmakers are often susceptible to favoring special interests.
Property a. b.
Either a ―bundle of rights,‖ or a single right to exclude others from one‘s resources. Property is a right. Resources are what people use to satisfy their wants or needs. Property is the method the state uses to create the maximum incentive in society for the generation of resources. In heterogeneous modern nations, property is the specific legal foundation for private enterprise. 1-10
5.
Property in its Broadest Sense a.
b.
6.
The right to exclude others from one‘s resources and to keep them from infringing on what is one‘s resources pervades Western legal systems. If the right of property is at the hub of these legal systems, contract is that important spoke whose rules provide for the transfer of an owner‘s resources, tort is that spoke which provides compensation for wrongful injury to one‘s resources, criminal and administrative law both protect and regulate the resources of owners, and even constitutional rights guarantee one a right to exclude the state itself from what James Madison termed one‘s ―faculties‖ (facultative resources). Madison means that the American constitutional rights themselves—such as freedom of speech—can be thought of as subsets of the broad right to exclude others, especially the state, from one‘s resources.
Jurisprudence a. b.
The definition should discuss the philosophy of law and natural law, positive law, historical jurisprudence, and sociological jurisprudence (includes legal realism). Natural law speaks of enduring principles of law, whereas sociological jurisprudence believes law changes to meet changing conditions.
Classifications of Law 7.
Common Law and Civil Law a.
b.
8.
Public and Private Law a. b.
9.
The common law legal system emphasizes the role of judges in determining the meaning of laws and how they apply. Because the U.S. was colonized by England where the common law originated, the U.S. has continued to use the system. The primary distinction is the emphasis that common law places on courts interpreting law, whereas in civil law the emphasis is on the legislature interpreting law.
Public law involves the regulation of society by the state. Criminal law, constitutional law, and administrative law are three examples. Private law regulates relations between and among individuals. Property, contracts, and tort law are three examples.
Civil Law and Criminal Law 1-11
a. b.
Civil law does not apply imprisonment to punish its violation, and criminal law, which is an offense against the state, does. Civil law applies both to noncriminal law and to the system of law that emphasizes legislative acts and interpretation.
10. Substantive Law and Procedural Law a.
b.
Substantive law regulates the rights and relationships between people or people and the state, whereas procedural law specifies the methods and means by which substantive rules are made and administered. Contract law is substantive law. Requiring 30 days to answer a complaint is procedural law.
Sources of Law 11. Federal Law a. b.
It means that all other laws are subordinate to the Constitution. The federal constitution is the supreme law of the entire United States and overrides state constitutions when they conflict with the federal constitution.
12. State Law a. b.
c.
Acts and statutes are two additional terms for legislation. Uniformity of law is important to business because it adds certainty, stability, and predictability to business decision making. Codifying law is one way of achieving uniformity; federalizing state laws, another. The most significant law affecting business is the Uniform Commercial Code. Administrative agencies allow groups of designated individuals to specialize in narrow areas and under a delegation of appropriate authority, to create regulations in those areas to regulate business and industry.
13. Judicial Decisions or Case Law a.
b.
Stare decisis includes the doctrine of prior precedents. It provides certainty, stability, and predictability. There are often conflicting precedents in multiple jurisdictions and, overall, a huge number of precedents. The precedent is created from a case opinion‘s holding, which addresses the specific issue(s) before the court. Dicta consists of whatever else a court might write in its 1-12
c.
opinion. Stare decisis obligates future courts to follow only precedent. Students‘ answers will vary. Conflicts of law principles usually state that the laws of the state where the accident occurred are the applicable substantive laws.
14. Sources of Law Hierarchy in Review a.
Students‘ answers will vary. If a judicial decision interprets legislation as meaning a certain thing, can the legislature pass a new law that contradicts the court‘s interpretation?
15. Legal Sanctions a. b.
Legal sanctions are important in a property-based legal system because law is enforced by taking a person‘s life, freedom, or the resources that he or she owns. A sanction is a method or means that encourages or forces compliance to the law. A remedy rectifies a wrong.
16. Sanctions for Criminal Conduct a. b.
The sanctions for criminal conduct include death, fine, imprisonment, removal from office, and removal of the right to vote. Criminal sanctions are set in place to protect the public, to bring justice to those who have been wronged, and to deter persons from wrongful conduct.
17. Sanctions for Breach of Contract a. b.
Compensatory damages are designed to place the non-breaching party in the same position he or she would have been in had not the contract been breached. A remedy that orders the breaching party to perform the specific obligation under the contract.
18. Sanctions for Tortious Conduct a. b.
The two premises of tort liability include intentional or negligent injury to others. Punitive damages are appropriate for intentional or willful and wanton injury.
19. Sanctions for Violating Statutes and Regulations a.
The types of sanctions used for the violation of statutes and regulations include fines, imprisonment, injunction, and damages. 1-13
b.
An injunction is an order of the court to do something or to refrain from doing something.
Property and Corporate Governance 20. The Specific Sense of Corporate Governance a.
b.
In a ―specific‖ sense, corporate governance refers to the rules regulating the legal relationship between corporate shareholders and corporate agents like the board of directors and senior executive managers. Some managers try to artificially raise or ―puff up‖ the market price of their stocks in order to raise their incomes by millions of dollars even as they mislead the owners about the true value of the corporation and risk corporate collapse when the true situation is disclosed. Other ways include managers‘ engaging in insider trading of stock, running up stock prices in order to exercise stock options, and taking advantage of business opportunities that rightfully belong to the corporation and its shareholders.
21. The General Sense of Corporate Governance a.
b.
In a ―general‖ sense, corporate governance refers to the regulation of business activities as they might harm public resources like the air and water or the private resources of others. Effective corporate governance contributes to the creation of economic wealth by encouraging investment in corporate ownership in spite of the fact that corporate owners have little control over corporate assets.
Business Discussion #1 1.
Do you know everything you need to make an investment decision? No, there is a lack of fundamental information critical to understanding the risk and likely chance of success if the company invests in China. How will the investment profits be taxed, how will the state protect resources, will the state expropriate the investment, is there adequate enforcement of contracts? Law is the foundation of private enterprise in the modern nation because if law and its enforcement is inadequate, the risks of doing business are too great.
2.
If not, what else do you need to know about investment in foreign countries? One needs to understand whether or not the country has legal institutions conducive to 1-14
successful business investment, such as whether the country has adequately enforced legal fences that will protect what one needs, including the actions one must take, in order to do business successfully. 3.
What does it mean to say that law is the foundation of the private enterprise system? It means that the private market in modern nations depends on the state‘s protection of privately owned resources (property system) through the adequate enforcement of resource exchanges (contract), criminal laws against theft and fraud, and compensation for wrongful injuries to resources (tort law). Just compensation for state expropriation of an owner‘s resources is also a necessary foundation to give incentive for maximum investment and production in private enterprise.
Business Discussion #2 1.
What is law? Law is a series of rules enforced by the state. In a democracy, it will have a moral basis.
2.
What does it mean to say that Darden has “property” in the land? That the hunter has “property” in himself? The essence of property is the right to exclude others, including the state itself. Infringements on (or trespass to) an owner‘s land can lead to compensation or punishment. In the broad, Madisonian sense of property, the same analysis applies to the hunter‘s ―ownership‖ of himself. Discuss this concept of self-ownership with the students. Just because people cannot sell themselves into slavery does not mean that people have no property in themselves or that people cannot sell their services, give away a kidney, or exclude others from infringing on them.
3.
What sources of law will the attorney have to understand in order to advise Darden about the proposed greenway? The company’s potential responsibility to the hunter? Discuss the section on constitutional law. Mention eminent domain, just compensation, and reference Chapter 7 (Property) and Chapter 10 (Torts). It must be pointed out to the students that being a trespasser does not free Darden from its responsibility not to harm individuals.
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Chapter 2 The Role of Ethics in Decision Making Learning Objectives The primary objective of this chapter is to emphasize the growing importance of ethics to business conduct. The second objective is to provide a historical and philosophical framework for the study of ethics. The third objective is to furnish business students with an individual framework for ethical decision making. To achieve its objectives the chapter discusses the relationship between morals and ethics and then of ethics and law. Formalism and consequentialism, the two principal schools of ethical thought, are developed. Sources of ethical values are explored. The difficulties of ethical decision making within large business organizations are examined. The chapter concludes with a discussion of the morality of property.
References
Barry, Norman P., Business Ethics. Lafayette, Ind.: Purdue University Press (2000). Berenbeim, Ronald, Company Programs for Resisting Corrupt Practices: A Global Study. NY: Conference Board (1999). Bowie, Norman and Patricia Hogue, Management Ethics. Blackwell Pub. (2004). Carroll, Archie B. and Ann K. Buchholtz, Ethics and Stakeholder Management, 4th ed. SouthWestern (2000). Donaldson, T., et al, Ethical Issues in Business, 8th ed. Englewood Cliffs, NJ: Prentice Hall (2006). Maidment, Frederick and William Ethridge, Business in Government & Society: Ethical, International Decisionmaking. Englewood Cliffs, NJ: Prentice Hall (2000). Hartman, L. P. and DesJardins, Business Ethics. McGraw Hill (2007). Pojman, Louis P., The Moral Life. Oxford U. Pr. (2003). Shaw, William H. and Vincent Barry, Moral Issues in Business, 8th ed. Belmont, CA: Wadsworth (2001). Williams, O.F. and J.W. Hauck, The Common Good and U.S. Capitalism. Lanham, MD: University Press of America (1987). Wines, William A., Ethics, Law, and Business. Lawrence Erlbaum (2006).
Teaching Outline 1-16
I. Contemporary Business Ethics
A. Modern Ethical Challenges in Innovation and Technology (LO 2-1) Emphasize: New ethical questions have emerged due to advances in technology and innovation in all aspects of our lives. Additional Matters for Discussion: What will be the effects of artificial intelligence (AI) on ethics and business as it becomes more prevalent and advanced? B. Ethics and Society Emphasize: That as society changes, shared values emerge that strengthen ethical foundations. Additional Matters for Discussion: Facebook selling targeted advertisement from its users‘ information. Is this good business or an ethical violation based on breaching user‘s privacy? The 2013 National Business Ethics Survey, conducted by the Ethics Resource Center, found the lowest number of people observing misconduct in their workplaces than at any time in the survey‘s history. Are reforms working? Point out that over 20% of today‘s large companies have ethics officers whose job is to develop ethics policies, listen to complaints of ethics violations, and investigate ethics abuses. Why is this good business? Statement of Stephen Fink, president of Lexicon Communications Corp. of Los Angeles: ―The number one cause of business decline in this nation is unethical behavior of executives—and of younger managers pushing to move up the ranks.‖ From the Christian Science Monitor: ―A study by the Josephson Institute for the Advancement of Ethics... talks about an unwillingness or inability of parents, schools, and political leaders to establish firm ethical standards of conduct and hold youth accountable to them. It speaks of a progressive emphasis on self-aggrandizement, personal gratification, and, ultimately, acquisitiveness.‖
Changing Normative Values
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Emphasize: That diversity fosters concern over values, and as America becomes increasingly pluralistic, changes in traditional norms create challenges in establishing shared values. Economic Interdependence Emphasize: That a serious ethical problem arises from economic interdependence and the modern corporation, which is the structure of most large businesses in this country. News Media and the Internet Emphasize: That news media and the Internet make it increasingly difficult to hide the questionable behavior of large organizations. Sidebar 2.1 titled ‗Wells Fargo Sham Accounts‘ C. Ethics and Government Emphasize: That government often steps in when businesses act unethically. That business leaders have incentive to promote corporate integrity, and thereby to limit further governmental regulation. Additional Matter for Discussion: The Ethics Resource Center reports a survey that found that 85 percent of the nation‘s largest 2000 companies now have ethical codes or guidelines. Increasingly, corporations also have ethics officers and board of director‘s ethics committees. II. The Nature of Ethics A. Ethics and Morality Emphasize: That morality is the collection of values that guides human behavior. Why it is important for businesses to inculcate shared moral values. How businesses in the international arena often face different moral values. That ethics is a system for identifying and applying moral values. That the end result of ethical examination is the good. 1-18
That there is an important distinction between having a good time and leading a good life.
Additional Matter for Discussion: Ask the students if Gil Meche‘s decision to forego his $12 million salary for retirement was appropriate. What would the students have done? B. Ethics and Law (LO 2-2) Emphasize: That both ethics and law deal with right and wrong and foster social cooperation. That the state enforces law but that personal ethics are voluntarily observed. That ethical values are ultimately superior to law in ensuring responsible business behavior. The ethics surrounding price gouging (see Sidebar 2.2.) Additional Matters for Discussion: Point out that one can be ethical yet still break the law while one may also be unethical while remaining legal. When Mary Kay Corp. discovered that its rival Avon Products was going through Mary Kay‘s trash dumpster, it sued Avon. Avon settled the case by agreeing to stop the practice. Was what Avon did legal? Was what Avon did ethical? Is it good business or price gouging to raise prices during a pandemic similar to COVID-19 that occurred in 2020? III. Two Systems of Ethics A. Formalism Emphasize: That formalism is an approach to ethics that affirms an absolute morality. That it deals with absolute values without reference to their situational context. That the Bill of Rights contains examples of formalism. Additional Matters for Discussion: Note that in formalism the intent with which one acts determines the moral quality of the action, i.e., it is what one has in his/her heart that counts. Observe that intent is also required for most criminal liability. Discuss how the Golden Rule affects individual‘s actions. Example of formalism by management scholar Peter Drucker: ―There is only one ethics, 1-19
one set of rules of morality, one code: that of individual behavior in which the same rules apply to everyone alike.‖ For class discussion: A male bank president receives an invitation to join a male-only social club that will be a very important source of business contacts. Is it right for the president to join the club? If the students deem it deontologically proper for the president to join, change the facts to make the club a white-only club. For class discussion: Everyone should agree that robbing a bank is illegal and unethical. Would the students feel differently if a man robbed a bank because he was truly without money and needed the money to buy medicine necessary to live? Would they feel differently if the money was to buy medicine for his wife or his infant daughter? Kant and Formalism Emphasize: Kant and his categorical imperative. Examples of how formalism raises ethical questions for businesses. The Social Contract Emphasize: The social contract theory of John Rawls. That although formalism generally takes its rise from concepts of duty, social contract comes from ideas about ―agreement.‖ That the social contract theory concerns itself with how to construct a just society, taking into consideration the many inequalities of wealth, knowledge, and social status. That in deciding on the values of the social contract one places oneself behind a ―veil of ignorance.‖ Explain. That entitlement to certain basic rights and equal opportunity are basic values of the social contract.
B. Consequentialism (LO 2-3) Emphasize: That consequentialism deals with the moral consequences of actions rather than with their absolute morality. That consequentialism focuses on the common good. That the dominant form of consequentialism is utilitarianism. Whether ends justify the means. Always? Sometimes? That consequentialism provides the framework for much business ethics. 1-20
Facebook‘s response to fake news discussed in Sidebar 2.3. Is this an example of a proper business response to concerns that it profited from misinformation while undermining a common good?
Additional Matters for Discussion: An example of business consequentialism comes from Megan Barry, Senior Manager, Business Ethics at Nortel, and appears in a DePaul University virtual journal The Online Journal of Business Ethics, Vol. 2, No. 1 (2001). Barry says that Nortel‘s ethics ―Adviceline,‖ which produces 2000 telephone calls annually from Nortel employees saves the company money by identifying issues early, minimizing the loss of work time, and avoiding potential legal issues. Stanley Kiaer, director of the London-based Institute of Business Ethics, stated that various pressures from the public, from shareholders, from employee recruits, and from competitors (peer pressure) are leading to greater corporate emphasis on ethics. Said Kiaer, ―If it results in a more ethical stance the motive [for change] doesn‘t matter.‖ Emphasize that Kiaer‘s statement shows consequentialism. Consequentialist statement by Keith T. Darcy, president of the Foundation for Leadership Quality and Ethics Practice: ―Ethical business means better business. That‘s because straight-arrow firms will be perceived more favorably in the marketplace.‖ Consequentialist statement by Robert Denham, chairman of Salomon, Inc.: ―In the final analysis, most of the major institutions in our industry provide the same or very similar services. I believe that one important way that a firm can distinguish itself in the marketplace is to establish a solid reputation for integrity and adherence to high ethical standards. Salomon believes that in the long run, this is the best way to win customer loyalty.‖ One major study found that after 30 years an investment in 30 companies with a strong ethical orientation netted 4.7 times greater dividends than a similar portfolio of stocks chosen for their Dow Jones ratings. For class discussion: Dow Corning Wright, the leading manufacturer of silicone gel breast implants, announced that it had known for 20 years that some gel would seep out of the implants. Dow maintained that it did not believe that the leakage would cause health problems. Discuss with students whether or not it was ethical for Dow to wait 20 years before making this announcement. In consequentialist fashion, weigh out the various factors from Dow‘s perspective. For class discussion: In the 1970‘s, Ford Motor Company designed and built the Ford Pinto. It was created as a direct result of gasoline shortages and resultant higher gas prices. The Pinto was sold to meet the competition such as the VW Beetle. Unfortunately, when struck from the rear, the Pinto was prone to explosions. It was shown that Ford knew of the danger, could have made a low-cost repair and could have prevented the explosions and resultant deaths. Rather than decreasing their profit margin, 1-21
they sold the cars in the dangerous condition. Can the students find any justification for Ford‘s actions?
The Protestant Ethic Emphasize: That the ascendancy of consequentialism in business ethics is attributable to the decline of the Protestant ethic. That the Protestant ethic was a business-related ethic that viewed hard work, achievement, self-denial, truthfulness, promise keeping, and loyalty as absolute moral values. The ethic is based on religious belief. How rising wealth and the encouragement of mass consumption eroded the Protestant ethic. How vestiges of the ethic remain in business belief in hard work, rational planning, and bureaucratic hierarchies. C. Comparing the Two Ethical Systems Emphasize: That although formalists and consequentialists can arrive at the same conclusion regarding a problem, they use a different evaluation process. The ―Tobacco Facts‖ in Sidebar 2.4. Additional Matters for Discussion: Discuss the ethics of the tobacco industry in tolerating confectioners‘ use of tobacco brand trademarks in producing and selling candy cigarettes. A University of Rochester School of Medicine study released in 2000 reported that sixth graders who had used candy cigarettes were twice as likely to smoke as those who had not, regardless of parental tobacco use. Some four million adolescents aged twelve to seventeen were smokers as the century turned. During the 1990s, smoking by eighth and tenth graders increased by a third. The U.S. Center for Disease Control and Prevention reported: ―More than five million children under the age of 18 today eventually will die from smoking-related causes.‖ A Brown & Williamson Tobacco Co. senior official publicly called cigarette smoking ―a habit of addiction‖ and R.J. Reynolds internal documents refer to it as ―habit forming.‖ IV. Sources of Values for Business Ethics
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A. Legal Regulation Emphasize: That ethical values frequently become law and that legal regulation can reflect society‘s ethical values. That as a result, that legal regulation is a significant source of values for business ethics. At least five major ethical rules can be drawn from the law, which are as follows: o Respect for the liberty and rights of others. o The importance of acting in good faith. o The importance of exercising due care. o The importance of honoring confidentiality. o Avoidance of conflicts of interest. Additional Matters for Discussion: Ask the students to examine their major courses of study and to look at how the five ethical values above will come in to play when they graduate and begin work in their chosen careers. Observe that the Federal Sentencing Guidelines, promulgated in the early 1990s, reward business organizations that have made comprehensive efforts to institute ethics codes and programs. In sentencing for the criminal misconduct of its agents, corporations with comprehensive ethics programs receive significantly reduced punishment. Note that merely posting an ethics statement on the wall is not considered sufficiently comprehensive. Liberty and Rights Emphasize: That respect for the liberty and rights of others suggests formalist values. Consider due process guarantees, freedom of expression, and privacy legislation. Good Faith Emphasize: That good faith requirements can be found in the Uniform Commercial Code. That bad faith leads to a cause of action for tort in certain circumstances. That bad faith suggests formalism. Due Care Emphasize: 1-23
That due care, such as required in negligence law, derives from society‘s expectations about the reasonableness of actions. This suggests consequentialism (promoting the common good).
Confidentiality Emphasize: That confidentiality often arises when the law creates or requires fiduciary obligations. Various agency relationships demonstrate this. This suggests consequentialism by its purpose of enhancing the willingness to enter relationships through the expectation of confidentiality. Conflicts of Interest Emphasize: That conflicts of interest can arise in the law because of ―serving two masters,‖ and no agent or employee of one principal can secretly work for another whose interest competes with that of the first principal. B. Professional Codes of Ethics Emphasize: That recent years have revealed extensive development of group standards for ethical conduct. That the American Marketing Association‘s Ethical Norms and Values for Marketers. Observe how the excerpted material in Sidebar 2.5 provides a general framework for a great many specific rules. The American Institute of Certified Public Accountants Code of Professional Conduct. Again, point out that the excerpted material in Sidebar 2.6 provides a general introduction to many specific ethical requirements. How unethical conduct can lead to additional regulation such as Sarbanes-Oxley and can completely destroy a huge thriving company. That the professional organizations that have adopted these codes employ specific sanctions to back them up. Because the state will likely regulate these professions if they do not do so themselves, it is appropriate to term their ethical codes self-regulation. Additional Matter for Discussion: Ask the students to identify other formal and informal codes or standards of conduct that apply to their majors and to business in general. Students should be able to name GAAP, GAAS, the ABA Code of Conduct, the AMA Statement of Ethics, the ABA 1-24
Code of Professional Conduct, and others. C. Organizational Codes of Ethics Emphasize: That most large business organizations now have codes of ethics (often called codes of conduct) that provide values to be observed by all employees and management personnel. The Business Roundtable‘s list of topics that organizational codes of business ethics should cover. Additional Matters for Discussion: Students must appreciate that when a company implements an ethics program that it does more than issue a written ethical code. A comprehensive program has: o Ethics policies and procedures o Measures of ethical effectiveness o Rewards for ethical behavior o Guidelines for ethical decision making o Assessment of the ethical climate o Cultivation of ethical practices o Focus on ethical leadership o Ethics education and training Consider the statement of Robert Denham, chairman of Salomon, Inc., about that firm‘s steps to achieve an ethical organization: ―Salomon has addressed the need for individuals to take ethical questions seriously by a series of measures. First, we have issued unambiguous policy statements declaring that Salomon will adhere strictly to the highest moral and ethical business standards. Second, we have established a board-level compliance committee and directed our compliance department professionals worldwide to report directly to the committee any issues that they feel are not adequately being addressed. Third, to emphasize the seriousness that I attach to the issue, I have given my personal home phone number to the senior managers—including the compliance professional—of each of our operating subsidiaries together with instructions to call me in the event that they uncover a material violation of this policy. Fourth, we have issued written manuals setting out policies for each of our trading desks and we have required our 200 senior employees to certify their compliance with those policies. Fifth, in our training efforts for new recruits and for long-term employees, we have increased the emphasis on the need for ethical business conduct.‖ Ask students to consider why companies that have codes of conduct have a higher percentage of reported misconduct than do companies without a code of conduct. Several corporations have an ethics ombudsman who plays a vital role in defining what 1-25
is right and wrong or acceptable and unacceptable for their companies. Having an ombudsman has been identified by the Federal Sentencing Guidelines as part of a comprehensive ethics management program. One thing several large companies have done is give their employees a toll-free number to call to help resolve ethical and related dilemmas. William Griffin, VP for Ethics and Business Policy at Sears reported that ―Assist Line‖ received 15,000 calls yearly from Sears‘ 300,000 employees. An Industry Week survey reports that three of four surveyed claim that their company‘s code of ethics—or ethics generally—means something to them in their daily work. But 63.9% of those surveyed reported having witnessed unethical behavior. Different Approaches to Ethical Codes Emphasize: Boeing‘s Code of Conduct in Sidebar 2.7. Discuss whether it is more appropriate to have a short or a long business code of conduct. That because codes of business ethics are often backed up by sanctions, it is appropriate to term them ―self-regulation.‖
D. Individual Values (LO 2-4) Emphasize: That ethics ultimately boils down to the individual values one applies in decision making. That individual values can be explored by asking five important questions in situations of decision making: o Has one thought about whether the action one may take is right or wrong? o Will one be proud to talk about one‘s actions to his or her family, to his or her employer, or to the news media? o Will one be willing to act as one is thinking of acting? o Will one‘s decision cause harm to others or to the environment? o Will one‘s actions violate the law? Additional Matters for Discussion: Discuss John Smale‘s statement that ―there is an ethical dimension to most complex business problems.‖ Examine Hannah Arendt‘s statement that evil often comes from a kind of thoughtlessness. Consider Plato‘s statement that immoral behavior often flows from ignorance. 1-26
Discuss why Mortimer Adler observed that Americans lack ―much that is needed for the good life.‖ The Dow Corning code of ethics says, ―We will act with the idea that everything will see the light of day.‖ This is a variation of the 11:00 o‘clock news concept, which asks how you would act if what you did was to be broadcast on the 11:00 o‘clock news. (Perhaps today‘s students might relate better if we substitute the Internet for the 11:00 o‘clock news.)
V. Achieving an Ethical Business Corporation A. The Obstacles (LO 2-5) Emphasize: That there are obstacles to ethical corporate behavior that deserve serious consideration. Additional Matters for Discussion: Discuss the impact of executive stock options and stock price related bonuses on the problem of overstating earnings to raise stock prices. Bring up the issue that part of the 2008 stock market collapse and credit failure, which may have been caused initially by financial executives taking risks with their corporations‘ assets that they would not have taken with their own, principally in the creation, sale, and purchase of incredibly risky and complex mortgage-backed securities. Ask the students to consider Sweden‘s concept of ―lagom.‖ Would it affect research and development by corporations? Would it hinder other forms of innovation? Could it work in the United States? Refer to sidebar 2.8. Max Clarkson of Toronto University‘s Institute of Business Ethics stated: ―One of the fundamentals of business is that you are invariably in a conflict of interest between your personal interest and the fiduciary duties you bear.‖ Illustrating how an overemphasis on profit can cause unethical behavior in lower echelon employees, one corporate executive says, ―That‘s when the boss tells a subordinate to ‗move it‘—just get it done, meet the deadline, don‘t ask for more money, time or people, just do it—and so it goes on down the line.‖ That ―is the heart of unethical practice in business.‖ Consider the statement of Robert Denham, chairman of Salomon, Inc.: The single greatest ethical concern facing any large financial institution is to instill in each employee a sense of personal responsibility to actively seek out ethical questions and to confront them candidly. Too often individuals try to shirk their obligations by claiming that they were following the orders of supervisors, or otherwise claim that ethical concerns were someone else‘s business. Gift giving in business presents ethical obstacles. Many corporations limit or entirely 1-27
prohibit employees from accepting gifts from suppliers or customers. For instance, Microsoft routinely mails a notice to its suppliers that Microsoft employees are forbidden to accept gifts. Compare the practice of some Internet and other firms in giving the employees of their customers shares or options of stock in their initial public offerings. Note that U.S. companies lose over a billion dollars annually because employees use company assets—such as long-distance phone calls and supplies—for personal purposes. The Emphasis on Profit Emphasize: That the focus on profit, ―the bottom line,‖ can promote unethical behavior within a large business organization, especially when senior executives order line managers to ensure profit. The Effect of the Group Emphasize: That another obstacle is the willingness of individuals to act unethically in a large group when they would never do so alone. Illustrate with the familiar statements ―I did it because everyone else did it‖ and ―just following orders.‖ The Control of Resources by Nonowners Emphasize: How ethical business practice as well as corporate governance is made more difficult by the very nature of modern business corporations that gives managers access and control over resources owned ultimately by the shareholders. Sidebar 2.9 titled ‗Failure and Collapse.‘
B. The Steps Emphasize: That despite the obstacles that sometimes stand in the way of ethical corporate behavior, certain steps can be taken to promote business ethics in corporate life. Additional Matters for Discussion: Provide some examples of decisions that local, national and international companies have made (or might make) and have the students identify the stakeholders affected. Consider the statement of Ward Classen, general counsel of CSC Intelicom, Inc.: 1-28
―Leadership begins at the top. The company‘s chief executive officer must make it clear that he or she regards the adherence to ethical standards a top priority and that the failure to adhere to such standards will be considered a serious offense.‖ In 1995, Lockheed pleaded guilty to conspiring to violate the Foreign Corrupt Practices Act and paid a $24.8 million fine. Subsequently, the company instituted a sophisticated online training program on ethical and legal compliance. Between 1995 and 2000 it discharged more than 200 employees for ethical violations. Have the students consider the effects of statements contained in a company‘s mission statement and/or vision statement and the tone they can provide. Are the students aware of their school‘s vision and mission statements? Involvement of Top Management Emphasize: That the single most important step toward achieving an ethical corporation is for top management to act as a role model for values it wishes corporate employees to share. That employees tend to adopt top management‘s real values, as set by example and implicit statement. That even with a current microscope on corporate ethics, 59% of the largest British companies and a similar amount in the U.S. offer no training to lower management with regard to the meaning and use of their corporate code of ethics. Sidebar 2.10 ―Removing Conflict Minerals from the Supply Chain.‖ Openness in Communication Emphasize: That to accomplish an ethical corporation there must be an open and continuing dialogue on ethics. The strategies for promoting the ethical corporation as suggested by the Business Roundtable. Consideration of All Stakeholders Emphasize: The ethical importance of business management considering the many different parties affected by business actions, known as ―stakeholder theory.‖ Suggest that stakeholder theory is a reflection of the increasing recognition of social interdependence.
C. The Rewards 1-29
Emphasize: The enormous size of the world‘s largest companies. That profits and business ethics are not contradictory. That unethical behavior is a business liability. That businesses must always be ethically sensitive changes in society. That business ethics reflect business leadership. That in reading subsequent chapters on business regulation, students should consider the ethical lapses that contributed to imposition of regulation. If ethical self-regulation does not guide business behavior sufficiently, legal regulation often follows quickly. Additional Matters for Discussion: An editorial in Industry Week concludes: ―Industrial management is neither a science nor an art. It‘s more of a process. An ongoing concern for ethics throughout an organization will improve that process. Even when times are tough.‖ For an international perspective on ethics, see T. Donaldson, ―Values in Tension: Ethics Away From Home,‖ Harvard Business Review, Sept.-Oct. 1996. D. Can a Business Have a Conscience? Emphasize: The ―personhood‖ rights of a corporation have long been recognized in the law. The Affordable Care Act includes a provision that businesses‘ health care insurance plans offered to employees must include coverage for a wide range of contraceptives. Additional Matters for Discussion: Sidebar 2.11, ―Same-Sex Marriage Debate and ‗Kiss-Ins,‘‖ for an example of a business representing its business owners‘ religious beliefs. Discuss the legal issues in Citizens United and the Hobby Lobby case.
Answers to Review Questions and Problems Contemporary Business Ethics 1.
Ethics and Society The answer should mention the increasingly complex, diverse society. The problems in the American economy have become a concern for all Americans and many of these problems are highlighted by corporate collapses and governmental bailouts. Most people see a direct connection between a lack of ethical conduct in business and these current troubles. 1-30
2.
Ethics and Government Certainly, criminal penalties brought against unethical executives and their incarceration has increased ethical scrutiny on business. Laws such as the Federal Sentencing Guidelines and Sarbanes-Oxley have created specific legal guidelines and defined penalties.
The Nature of Ethics 3.
Ethics and Morality Morality consists of the values that guide one‘s behavior, while ethics is the systematic statement of right and wrong together with a philosophical system that both justifies and necessitates rules of conduct. The end of ethical examination is ―the good.‖
4.
Ethics and Law Law is a floor for ethical behavior. It is hardly a ceiling. As a process, the law does not serve well to provide the necessary sensitivity to achieve an ethical business life. What the marketing consultant is arguably saying is that ethics are irrelevant to business life. A business can act legally yet still be acting unethically. Eventually, the unethical behavior can come back to harm the company.
Two Systems of Ethics 5.
Formalism The language of ―inherent wrong‖ shows absolute moral values, which is formalism. In consequentialist analysis, overseas bribery may be morally wrong because it could lead to bribery attempts in this country, either by foreign or domestic companies. It could also have adverse repercussions on U.S. business or policy in foreign countries.
6.
Consequentialism In most business contexts, this issue will be treated strictly through consequentialist analysis. A formalist approach to this issue should question whether a policy of document shredding leads to unacceptable deceit, akin to lying. Also, does shredding make it easier for executives later to lie about company actions? Remember that lying is deontologically unacceptable.
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7.
Comparing the Two Ethical Systems a.
b.
Either in terms of promoting the common good or of limiting harm to others, it would seem that these advertising appeals are unethical. Leading to this conclusion is the addictive nature of tobacco consumption and its known harm. While tobacco advertisers argue that advertising does not catalyze consumption; it merely initiates brand switching. The use of cartoon characters enhances recognition in young children and can mask the dangers inherent in smoking. As the children grow, the ingrained appeal of the product can lead to initial use.
Sources of Values for Business Ethics 8.
Legal Regulation Law is frequently reactive rather than proactive. As the society changes, societal views regarding acceptable behavior changes. When regulation is deemed necessary, laws are enacted to either define or limit acceptable conduct. Ethical values reflected in the law include respect for the liberty and rights of others, acting in good faith, exercising due care, honoring confidentiality, and avoiding conflicts of interests.
9.
Professional Codes of Ethics This is an open-ended question designed to get students‘ views on lawyers out in the open. Share with the students that lawyers are criticized both in the Bible and in Shakespeare. Since lawyers are tasked with acting zealously on behalf of their clients, someone who has broken the law or acted unethically must be provided legal assistance. Many people don‘t understand this. The lawyer‘s job is often to make sure that the system does its job. Hence the cases like the O.J. Simpson case and the Casey Anthony case give defense lawyers a bad name.
10. Organizational Codes of Ethics a.
b.
This cynicism almost certainly arises because of the contradiction that lower level employees feel between the ethical values expressed by company codes and the value of ―profit first‖ that these employees perceive is the true value of top management. Top management must lead through example and be clear and consistent in the communication of ethical values.
11. Individual Values 1-32
Students‘ answers will vary. Achieving an Ethical Business Corporation 12. The Obstacles a. b.
The answer should address how an overemphasis on profit and the effects of group pressure make it hard to do what is morally correct in corporate decision making. The need to retain proven successful leaders has largely led to this increased discrepancy. Emphasis on profits has made it imperative for businesses to increase pay to those who create those profits. The negative effects of a CEO leaving a company for another, taking not only their management skills, but also their intimate knowledge of the company, often compels overpayment. To a large extent, if one company is willing to overpay, other companies must do so to remain competitive. One might liken this to free agency in sports, which exponentially raised salaries to implausible levels.
13. The Steps Corporate culture is based on loyalty and teamwork. ―Telling on‖ one‘s superiors or coworkers is perceived as being disloyal and acting at odds against the team. Jackall says that in a corporate top-down hierarchy, strict loyalty is required of subordinates in exchange for mentoring and advancement. Whistle-blowing violates the expectations of this system. To make whistle-blowing acceptable, or at least more acceptable, will require clear approval and modeling from corporate top ranks. To this end, whistle-blowing is an appropriate subject for corporate ethics codes. 14. The Rewards Legal regulation lacks flexibility and is inadequately informed to be the only social guide for business decision making.
Business Discussion #1 1.
Is it ethical for you to hire away from your competitor a secretary who may have overheard something that will be useful to you? Is it ethical for you to send an attractive employee to a bar where your competitor’s programmers hang out in the hope of getting the information you want? Discuss the section on individual values. In these first two instances, one should think how one would feel if the rival company did what one was contemplating. Certainly, one would 1-33
feel that unethical behavior was being used. One should think whether one would be happy to see one‘s contemplated actions publicized? Certainly not. Note that the stealing or misappropriation of trade secrets is illegal so both ethical and legal concerns are being violated. 2.
Is it ethical for you to have someone hunt up and read everything published by your competitor’s programmers in case they may have let slip something that will help you? This third instance presents no problems from a legal or ethical perspective. Information readily available in public sources is ―fair game‖ and simply doing honest research is a good business practice.
Business Discussion #2 1.
If follow-up animal studies of the new drug do not show significant side effects, would it be ethical for the company to tell the two researchers to keep quiet about their concerns? Discuss the moral difference between telling a lie and merely not speaking. As long as the FDA is properly informed of all concerns and the public appropriately warned according to FDA standards, it may be ethical for the company to ask the researchers not to broadcast their concerns and possibly threaten the marketing of the product. However, this conclusion is certainly debatable.
2.
Is it ethical to put animals at risk in order to test the drug’s safety? Use this discussion to illustrate the difference between formalist approaches, such as ―harming living creatures is always wrong‖ or ―God gave humans dominion over the animals,‖ and consequentialist approaches such as ―the benefit to humans outweighs the injury to a few animals‖ or ―insensitivity to animal welfare leads to insensitivity to human welfare.‖
3.
Is it morally right for PharmCo to maximize its profit even if it means many men will have to remain bald? Does your answer change if the drug cures rheumatoid arthritis? AIDS? The latter questions address very real issues. From a personal perspective, is comparing a drug that helps users cosmetically to a drug that potentially saves lives a truly valid comparison? From a business perspective, ask students if it is moral to require pharmaceutical companies to surrender resources when others in the property system are not surrendering theirs? The point is that the moral imperative of helping those in need when society can easily do so leads as much to government taxation of all to purchase the drugs 1-34
for distribution to the poor as it does to making the companies that made the drug bear the burden. And, of course, there is the loss of incentive to produce new drugs for other diseases. If it is moral to help those in need, is it moral to require people to help those in need?
Chapter 3 Understanding The Court System Learning Objectives The purpose of this chapter is to acquaint the students with the judicial process or the ―rules of the game‖ so that they can appreciate the role of the courts in resolving disputes. The responsibilities of judges, jurors, and lawyers also are examined. The chapter will demonstrate the powers and functions of the courts and illustrate the many factors that make the outcome of any case unpredictable. Students will gain an understanding of the key personnel associated with the court system and how the court systems are organized and function, learn about the power of judicial review, and become familiar with background and judicial alignment of the current members of the U.S. Supreme Court. Finally, students will be exposed to a sample case from the U.S. Supreme Court, including the majority, concurring, and dissenting opinions.
References
Altschuler, Bruce and Celia Sgroi, Understanding Law in a Changing Society, Prentice Hall (1995). Berger, R., Federalism: The Founder‘s Design, University of Oklahoma Press (1987). Bradley, Craig M., The Rehnquist Legacy, Cambridge University Press (2006). Cardozo, The Nature of the Judicial Process, Yale University Press (1921). Domnarski, William, The Great Justices, 1941-54: Black, Douglas, Frankfurter and Jackson, University of Michigan Press (2006). Dionne, E.J. and William Kristol, Bush v. Gore: The Court Cases and the Commentary. Brookings Institution Press (2001). Douglas, William O., The Court Years, Random House (1982). Hansford, Thomas G., The Politics of Precedent on the U.S. Supreme Court, Princeton 1-35
University Press (2006). Holmes, The Common Law (1938). Parry-Giles,Trevor, The Character of Justice: Rhetoric, Law, and Politics in the Supreme Court Confirmation Process, Michigan State University Press (2006). Toobin, Jeffrey, The Nine: Inside the Secret World of the Supreme Court, Anchor Books (2008). Yarbrough, Tinsley, The Rehnquist Court and the Constitution, Oxford University Press (2000).
Teaching Outline
I. Personnel (LO 3-1) A. Judges and Justices Emphasize: The duties of a trial judge as contrasted with those of a reviewing court judge or justice. Have the students list the desirable qualities of each. The reasons that the judiciary is given almost absolute immunity from suit. The content in the marginalia that judges and justices often sacrifice considerable financial resources by giving up the practice of law in the prime of their careers. That most cases are settled before trial and that very few cases actually end up in appeal. The makeup of the current Supreme Court is detailed later in the chapter but the instructor may find it useful to review it at this point. Review Sidebar 3.1 titled ―The ―Daunting Workload‖ of Federal Trial Judges.‖ Case for Discussion: 1.
Pulliam v. Allen, 104 S.Ct. 29 (1984). Plaintiffs were arrested for nonjailable misdemeanors, and because they were unable to meet bail, the defendant state court judge committed them to jail. A federal district court enjoined the judge‘s practice by determining that judicial immunity did not extend to injunctive relief under Section 1983 of the Civil Rights Act. Issue: Is the state court judge immune from review by a federal court judge? Held: No. Affirmed. Judicial immunity is not a bar to prospective injunctive relief 1-36
against a judicial officer acting in his judicial capacity. Although there is a need for restraint by federal courts called upon to enjoin actions of state judicial officers, there is no support for a conclusion that Congress intended to limit the injunctive relief available under Section 1983 in a way that would prevent federal injunctive relief against a state judge. In addition, the plaintiff is entitled to attorney‘s fees—not damages. This is a modification of total judicial immunity. B. Jurors Emphasize: What a petit jury is. That the federal law does not specify the number of jurors—only the types of cases that may be brought to trial before a jury at common law. Legitimate and illegitimate excuses from jury duty. The instructor could consult the state statute on juries, and list for the students those persons who are exempt from jury duty. Have the students discuss whether or not juries are truly representative of society or of one‘s peers. Would they agree to serve voluntarily? The reasons for: o The trend towards less-than-unanimous verdicts. o Many citizens seeking to avoid jury duty, especially in long trials. o The jury system being subject to much criticism. Review Sidebar 3.2 involving the role of jury consultants and technical support. Review marginalia quotation by Jeremiah Black on the value of the jury system. Additional Matters for Discussion: Discuss the proliferation of mistrials caused by jury deadlocks. Consider racially sensitive cases and the impact of race and ethnicity on jury verdicts. Evaluate the unique challenges juries sometimes face including allegations that jurors are not qualified to distinguish fact from fiction, that they vote their prejudices, and that their emotions are too easily swayed by skilled trial lawyers. Discuss whether it‘s truly a fair trial when one party can afford jury consultants and the opposing party cannot. C. Lawyers Emphasize: That lawyers serve three very important roles: counselor, advocate, and public servant. That lawyers have many clients and often handle complex and complicated cases. That lawyers can be sanctioned for unethical conduct and some have gone to jail for illegal conduct. 1-37
The American Bar Association reported over 1.3 million licensed lawyers in the United States in 2018. Discuss the tension between the business community and the legal profession.
Additional Matter for Discussion: Note that law firms frequently use paralegals (legal assistants) to gather facts and assist attorneys. II. Organization of the Court System (LO 3-2) Emphasize: That lawsuits begin at the trial court level, and the results may be reviewed at one or more of the other two appellate court levels. A. Subject Matter Jurisdiction Emphasize: Subject matter jurisdiction refers to the power over issues involved in a case. Some issues are nonjusticiable, and courts do not accept cases involving trivial matters. That the content in the marginalia that courts of different scope and subject-matter jurisdiction help create order and efficiency. B. State Courts Emphasize: That state court systems are created, and their operations are governed, from three sources. The difference between trial courts and appellate courts. Additional Matters for Discussion: See Figure 3.1 on the typical state court system. The students could create a chart of the court system of their state and the reasons that each court exists. Point out that some states elect judges and in the others they are appointed. The students could check their state and surrounding states. What do they do? Trial Courts Emphasize: That 95 to 98 percent of all complaints are settled or fully resolved at the trial court 1-38
level. Appellate Courts Emphasize: That reviewing courts are essentially concerned with questions of law. That generally there is a right to only one appeal. That the procedure for requesting a second review is called in some states a petition for leave to appeal and in others a petition for a writ of certiorari. Note the small percentage of the petitions that are granted. Review Sidebar 3.3 on the small-claims courts and note the dollar limitation on the small-claims courts in the students‘ state. Suggest to the students that they attend a court proceeding, if possible. If the students watch any court on television, point out the show is great oversimplification of the system. Emphasize that attorneys are usually not required. Have the students list the typical types of cases and disputes that end up in such courts. The advantages and disadvantages of proceeding in small-claims court. C. Federal Courts Emphasize: That Article III of the Constitution (see Appendix) provides that judicial power be vested in the Supreme Court and such lower courts as Congress may create. That the judicial power of the federal courts has been limited by Congress. That federal courts have subject matter jurisdiction over federal questions cases and diversity of citizenship cases. That for purposes of diversity jurisdiction, a corporation is a citizen of the state of incorporation and also a citizen of the state in which it has its principal place of business. Note the tests for determining the principal place of business of a corporation. That no matter how many parties are involved in a lawsuit, there must be complete diversity in order for the federal court to exercise this kind of judicial authority. That if a case involves multiple plaintiffs with separate and distinct claims, each claim must satisfy the jurisdictional amount. Additional Matters for Discussion: Review Figure 3.2 on the federal court system and Figure 3.3 on the federal courts of appeals. The citizenship of all partners in a limited partnership must be taken into account when deciding whether diversity jurisdiction exists. Review Sidebar 3.4 showing cases granted certiorari by the U.S. Supreme Court by 1-39
circuit state and district courts. District Courts Emphasize: That the Federal Rules of Civil Procedure provide the details concerning procedures to be followed in federal court litigation. Appellate Courts Emphasize: That under its constitutional authorization, Congress has created 12 U.S. Courts of Appeal plus a special Court of Appeals for the Federal Circuit as intermediate appellate courts in the federal system. D. Decisions by the U.S. Supreme Court Emphasize: The function of the Supreme Court in ruling upon petitions for a writ of certiorari and the fact that only a small percentage of the petitions are granted. Review Sidebar 3.5 on the Very Slim Odds for having a case reviewed by the Supreme Court. Supreme Court case reviews have been steadily declining in recent years. The writ of certiorari is granted only if four of the nine justices vote to take the case. The limited review of the final decisions of state courts. Final judgments or decrees rendered by the highest court of a state are reviewed only by the Supreme Court of the United States. Additional Matters for Discussion: The growing political tensions on the Supreme Court as evidenced by the Bush v. Gore election decision in 2000 and the controversies in the Senate in recent years over judicial nominees. In the closing months of the Bush Administration, the Senate, controlled by the Democrats, failed to take action on a number of judicial nominees in order to preserve these openings for the Obama administration. Also, the hearings over the nomination of Supreme Court Justice Brett Kavanaugh demonstrate this tension. The reluctance on the part of the Supreme Court to resolve highly controversial subjects in definitive ways. The predominance of Supreme Court cases from the Ninth Circuit Court of Appeals. The role of the Supreme Court clerk and how they are often called upon to write the opinions for the Justices. Review Sidebar 3.6 on the Role of the Supreme Court and Chief Justice. 1-40
III. The Power of Judicial Review (LO 3-3, LO 3-4)
Emphasize: The language of Marbury v. Madison, which has led to a great concentration of power in the Supreme Court and judicial system. Call attention to the marginalia noting that judicial review is the ultimate power to invalidate actions by the president and the Congress. Call attention to the marginalia that many jurists believe in judicial restraint to some degree and many are activists in some situations. Many judges share aspects of both in their judicial philosophy. A. Judicial Restraint Emphasize: That the followers of judicial restraint are sometimes referred to as strict constructionists who believe the Constitution should be interpreted in light of what the Founding Fathers intended. Cases also should be decided on the facts, if possible, and on the narrowest possible grounds. That believers in judicial restraint feel that social, political, and economic change in society should result from the political process rather than from court action. That judicial restraint jurists have a deep commitment to precedent. Additional Matters for Discussion: Review Sidebar 3.7 on choosing a Supreme Court justice. Review Sidebar 3.8 on business and the Roberts Court. B. Judicial Activism Emphasize: That judicial activists favor a more expansive role for the courts and want the courts to play a major role in correcting the wrongs in the society That activists tend to be innovative and less dependent on precedent for their decisions. That during the 1950s and 1960s, activist justices brought about substantial changes in civil rights, reapportionment, and criminal law. Review Sidebar 3.9 on the typical alignment of justices. Review Sidebar 3.10 on labeling judges as liberal or conservative. Review Sidebar 3.11 on the Supreme Court justices. Additional Matters for Discussion: 1-41
Determine which justices favor the philosophy of judicial activism and what Presidents selected them for the Supreme Court. Note that the Trump administration is likely to favor the appointment of more originalist judges. This is a switch from the Obama administration, which appointed more activist judges.
C. A Sample U.S. Supreme Court Case Emphasize: The sample case is an example of how the Supreme Court influences critically important areas of the law. Controversial cases often are decided by a split among the nine justices (in many cases it is 5-4 although this case was 6-3 with some concurring opinions and opinions concurring in part and dissenting in part). This decision questioned what comprises immoral or scandalous material in trademarks under the Lanham Act. Erik Brunetti sought federal registration of the trademark FUCT. Case 3-1: Iancu v. Bruentti, 588 U.S. (2019). D. The Nature of the Judicial Process (LO 3-5) Emphasize: Justice Benjamin Cardozo‘s five forces that shape a judge‘s work are logic, history, custom, utility, and accepted standards of right conduct. Cardozo‘s language that ―in the main there shall be adherence to precedent.‖ Present logic has a force in shaping the law as well. (See Sidebar 3.12). Additional Matter for Discussion: Discuss whether modern-day judges still follow Cardozo‘s approach. Review the most serious challenges to an effective court system today. Student opinions will vary but should lead to spirited discussions.
Answers to Review Questions and Problems
Personnel
1.
Judges and Justices
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The trial judge is responsible for providing litigants with procedures to handle all pretrialand trial-related matters. During the trial itself, the judge must apply legal principles that will enable the jurors to find the facts of the case. 2.
Jurors The move away from unanimous jury verdicts prevents one or two jurors from creating a mistrial through a hung jury. Research reveals that foregoing unanimous verdicts have not harmed the credibility of the litigation process.
3.
Lawyers Lawyers serve their clients and the public in at least these roles—as a counselor, as an advocate, and as a public servant. In recent years, lawyers and business clients have clashed over the increased volume of cases and costs related to handling the litigation.
Organization of the Court System
4.
Subject Matter Jurisdiction The state court of Georgia would have jurisdiction over this matter. Since the matter is not a question of federal law, the federal court only could exercise jurisdiction under diversity of citizenship. However, both a plaintiff and defendant are from the state of Georgia defeating the diversity requirement. If a case involves a party on one side that is a citizen of the same state as a party on the other (Mark and David‘s employer), there will then be no diversity of citizenship and thus no federal jurisdiction.
5.
State Courts The reviewing or appellate courts evaluate questions of law and tend to defer to factual decisions made by the lower courts. Lower courts are focused on determining facts and applying the law to those facts. Reviewing or appellate courts evaluate whether the law was applied properly or whether the law should be changed.
6.
Federal Courts Yes. This case is properly in the federal court system since it involves the authority of a 1-43
federal agency (the FDA) to determine the definition of a drug. 7.
Decisions by the U.S. Supreme Court Susan has very little chance of getting the Supreme Court to review her case unless she can demonstrate a substantial federal issue in what appears to be a simple state contract dispute.
The Power of Judicial Review 8.
Judicial Restraint Judicial review provides courts with the authority to review actions taken by the other two branches of government and to declare them unconstitutional. Advocates of judicial restraint are reluctant to exercise this authority and give great deference to the actions of the political branches of government.
9.
Judicial Activism Judicial activists are more willing to review actions of the other two branches of government. They believe the courts have a major role to play in correcting wrongs in the society. Activist courts tend to be more result conscious and to place less reliance on precedent. Judicial restraint jurists have a deep commitment to precedent and will overrule cases only when the prior decision is clearly wrong.
10. A Sample U.S. Supreme Court Case Dissenting opinions are important because they allow the minority view of the court on a particular issue to be expressed. Often a dissenting opinion in one case may create an opportunity for its usage in a later case that eventually informs the majority view. There have been many examples in history when a dissenting opinion later becomes the law of the land. A concurring opinion strengthens the decision by the court. 11. The Nature of the Judicial Process Justice Cardozo‘s five forces that shape a judge‘s work are logic, history, custom, utility, and accepted standards of right conduct. Justice Cardozo compares a judge‘s job to that of a legislator, and the end served by law must dictate the administration of justice. Students‘ answers regarding the last part of the question will vary.
Business Discussion #1 1-44
1.
Where does your duty lie in serving on a jury? One‘s duty rests in serving on the jury, and one‘s employer will need to find a solution to the business difficulties one‘s service may create.
2.
Are you protected against adverse employment action by your firm for missing work to serve on a jury? If an employer takes any adverse action against one because of jury service, the employer is subject to civil and criminal liability.
3.
How do you reconcile the woman’s prior heart palpitations from years ago with her recent attack? Was her heart already compromised before she began taking the painkiller Oxxy-1? While serving on a jury, one must weigh the evidence and try to render a decision based upon the information presented by the litigants. It‘s a tough balancing act for a jury, and different jurors may come to different conclusions when hearing the same evidence in a particular case. In the end, the jury as a whole has to weigh the conflicting information and render a fair and just decision based upon the evidence and the law.
4.
Why didn’t the pharmaceutical company withdraw the painkiller from the market at the first sign of a problem? The facts don‘t provide a definitive answer. Perhaps the evidence was not clear showing a direct causal relationship. Perhaps the woman had a history of heart problems unrelated to the drug. Naturally corporate profits must be considered and the drug may not have been withdrawn due to greed.
Business Discussion #2 1.
Who should you turn to for advice? One should arrange to meet with the general counsel and executive staff. A meeting with the report‘s author could provide some additional insight before deciding whether or not to convene the company‘s board of directors.
2.
Should you destroy the report? Destruction of the report would be the wrong approach to the situation and would not solve 1-45
this problem or reduce liability. It is also a morally indefensible action. 3.
In which court can a lawsuit be filed? A product liability lawsuit, such as this one, normally would be filed in state court. However, federal jurisdiction is possible under certain conditions should diversity be shown or should a federal law be in question.
4.
If you lose the lawsuit at trial, can you appeal? An appeal by the defendant is possible in any case if prejudicial error can be shown.
Chapter 4 Litigation Learning Objectives The purpose of this chapter is to acquaint the students with the ―rules of the game‖ so that they can appreciate the challenges of litigation. Students will gain a better understanding of the litigation process and the parties to a case, how issues such as standing to sue, personal jurisdiction, and class action can impact litigation, the steps and costs associated with discovery, the pretrial and trial procedures in litigation, and the process for appeal and enforcement of judgments. Students should gain a better appreciation of the intricacy, difficulty, and costs of resolving disputes by litigation.
References
Abramson, Jeffrey, We, the Jury, Harper-Collins Publishers (1994). Blake, Susan H., Practical Approach to Effective Litigation, Oxford University Press (2005). Bourhis, Ray, Insult to Injury: Insurance, Fraud, and the Big Business of Bad Faith, Berrett-Koehler (2005). Cardozo, The Nature of the Judicial Process, Yale University Press (1921). Carlson, Ronald L. et. al., Dynamics of Trial, Prentice-Hall (1995). Derthick, Martha, Up in Smoke: From Legislation to Litigation in Tobacco Politics, (CQ 1-46
Press 2005). Federal Rules of Civil Procedure, West Publishing (2000). Garner, Bryan, The Winning Brief, Oxford University Press (1999). Gruthan, Roy et. al., Lawyers and Thieves: Legal Shenanigans, Courtroom Scandal, and the Endless Hunt for Money, Simon & Shuster (1990). Harr, Jonathan. A Civil Action, Random House (1996). Moore, James W., Moore‘s Federal Practice, New York: Bender (1984).
Teaching Outline
I. Litigation—An Overview (LO 4-1) A. Parties Emphasize: The terms used to describe the parties to both a lawsuit and an appeal. Contrast the terms used in civil cases with those used in criminal cases. That the complaint formally starts the lawsuit. Parties often have attempted to informally resolve their dispute through negotiation and alternative dispute resolution before the complaint is filed. The sample complaint in Appendix II. Additional Matters for Discussion: That the plaintiffs may join as defendants all persons who are necessary to a complete determination or resolution of the questions involved. The defendant may bring in new parties as third-party defendants, if needed to resolve the controversy before the court. Review Sidebar 4.1 discussing how inadequate risk management can lead to high cost of litigation. B. Standing to Sue (LO 4-2) Emphasize: The reasons that courts are not available to decide every controversy that may arise. That issues decided by a court must be raised by persons who will be directly affected by the outcome of the case. That standing is satisfied in the sample complaint. Case 4.1: Juliana v. U.S., F.3d (9th Cir.) 1-47
Cases for Discussion: 1.
Havens Realty Corp. v. Coleman, 102 S.Ct. 1114 (1982). The Fair Housing Act of 1968 outlaws discrimination in housing and authorizes civil suits to enforce the law. Suit was filed against the defendant operator of two apartment complexes alleging ―racial steering‖ in violation of the law. Plaintiffs were testers who never intended to rent an apartment. Coleman, who is black, was told that no apartments were available, but Willis, who is white, was told that there were vacancies. In fact, there were apartments available for rent. The district court held that the plaintiffs lacked standing and dismissed the suit. Issue: Did either party have standing to sue under the Fair Housing Act? Held: Despite the fact that the ―testers‖ had no intent to rent the apartments, Congress prohibited misrepresentation to ―any person.‖ Therefore all persons have a legal right to truthful information. Because Congress, in this act, intended to give standing the fullest extent possible, a plaintiff must simply allege that the defendant‘s actions resulted in a distinct injury. Since Coleman received false information, he can properly allege that the defendants injured him. Since Willis received accurate information, he cannot properly allege a violation of the Fair Housing Act.
2.
Sierra Club v. Morton, 92 S.Ct. 2361 (1972). Plaintiff, an organization concerned with conservation, brought suit for a declaratory judgment and an injunction to restrain federal officials from approving an extensive skiing development in the Mineral King Valley in the Sequoia National Forest. Issue: Does plaintiff have standing to sue? Held: No. A mere ―interest in a problem,‖ no matter how long-standing the interest and no matter how qualified the organization is in evaluating the problem, is not sufficient by itself to render the organization ―adversely affected‖ or ―aggrieved‖ within the meaning of the APA. The court looks to a personal stake in the outcome, in order to ensure that the proceeding will be adversary.
3.
Friends of the Earth v. Laidlaw Environmental Services, 528 U.S. 167 (2000). An environmental group filed a citizen lawsuit against the defendant alleging 1-48
noncompliance with the Clean Water Act. The court found sufficient environmental injury in fact when the plaintiffs claimed that they used the affected areas and are persons for whom the aesthetic and recreational values of the area will be lessened. C. Personal Jurisdiction Emphasize: The necessity of finding both subject matter and personal jurisdiction. That personal jurisdiction over the defendant usually is obtained by the service of a summons, although in some cases it is obtained by the publication of notice and mailing a summons to the last known address. The reasons for long-arm statutes and the three elements that must be evidenced for a court to apply a long-arm statute. The type of conduct that confers personal jurisdiction. Sidebar 4.2 ‗Personal Jurisdiction: Minimum Contacts,‘ which includes the case of World-Wide Volkswagen v. Woodson case. Sidebar 4.3 discussing where Mark Zuckerberg resides. Cases for Discussion: 1.
Burger King Corp. v. Rudewicz, 105 S.Ct. 77 (1985) A Michigan franchisee refused to vacate a Burger King restaurant premise after his franchise was terminated. The Burger King Corporation brought a diversity action in a Florida federal court. The franchisee claims that the Florida court has no personal jurisdiction. Issue: Is the Michigan franchisee subject to the jurisdiction of the Florida court? Held: Yes. The district court‘s exercise of jurisdiction pursuant to Florida‘s long-arm statute did not violate due process. The federal court in Florida may constitutionally assert, under Florida‘s long-arm statute, personal jurisdiction over a Michigan restaurant franchisee who, despite having no physical ties with Florida, established a substantial and continuing relationship with the franchisor‘s Florida headquarters and received fair notice from the franchise documents and course of dealings that he might be subject to suit in Florida for breach of the franchise contract.
2.
Calder v. Jones, 104 S.Ct. 1482 (1984). Shirley Jones, a professional entertainer who lives and works in California, brought suit 1-49
in a California state court claiming that she had been libeled in an article written by the defendants in Florida and published in the National Enquirer, a national magazine having its largest circulation in California. Issue: Does the California court have jurisdiction over the defendant? Held: Yes. California has personal jurisdiction over the defendant since the defendant‘s contacts with the state satisfied the Due Process ―minimum contacts test.‖ California is the focal point both of the allegedly libelous article and of the harm suffered. 3.
Toys “R” Us, Inc. v. Step Two, S.A., 318 F. 3d 446 (3rd Cir. 2003). The Third Circuit reversed the district court‘s dismissal of a trademark and cybersquatting case against a Spanish retailer. The court ruled that although Toys ―R‖ Us had not established personal jurisdiction, it had established enough to allow jurisdictional discovery to go forward.
4.
Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997). The court created a ―sliding scale test‖ to determine whether an internet-based company meets the standards for personal jurisdiction. This case has been used by many circuit courts, although they disagree on the level of interactivity that is required to meet the standards.
D. Class-Action Suits Emphasize: The reasons that plaintiffs desire to file class action suits. How much of the motivation is the lawyers‘ desire for fees? That many cases are not financially feasible unless filed as a class action, but note that the Supreme Court discourages class-action suits at the federal level. Do not assume that class-action suits can be easily settled, either. Sidebar 4.4 on consumer class actions in federal court. Sidebar 4.5 on examples of major class-action lawsuits. How a non-response by an individual to a request to join into a class-action suit can enjoin the individual as well as bind them to whatever decision or settlement is made. Case 4.2: Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011)
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Additional Matters for Discussion: Today, it is increasingly the corporate defendant that wants to be sued in a class action. It often actively arranges for the class action suit to be brought by a nominal plaintiff with the help of a friendly attorney. The aim is to render a quick settlement that binds all class members and precludes costly individual litigation. However, the Class Action Fairness Act of 2005 (CAFA) made it harder to do so. II. Pretrial Procedures (LO 4-3) A. Pleadings Emphasize: Figure 4.1 on pretrial procedure. The various pleadings that may be filed by a plaintiff and a defendant. Stress that the main purposes of the pleadings is to give notice of each party‘s contentions and to define the issues for the trial. That the complaint and answer provide the framework for litigating the lawsuit. That the court may enter an order of default, if the defendant does not respond. Sidebar 4.6 which discusses the sample complaint in Appendix II. Additional Matters for Discussion: Compare the pleadings required in a small claims court with those in courts of general jurisdiction. Note the trend of filing a complaint as a means of extracting a settlement offer in lieu of costly litigation. B. Steps in Discovery Emphasize: That the reason the surprises do not occur is the process of discovery. Purpose Emphasize: That discovery practice is designed to ensure that each side is fully aware of all the facts involved in the case and of the intentions of the parties. Methods Emphasize: 1-51
The discovery methods such as depositions, interrogatories, requests for production of documents. Note the cost of conducting depositions of potential witnesses. The use of requests for admissions after discovery has been completed. The role of discovery in encouraging settlements and preventing surprises at trial. It‘s important to take advantage of the discovery process to learn as much as about the strengths and weaknesses of the case as possible.
C. Scope of Discovery Emphasize: That discovery is very expensive and often time-consuming for the parties involved. The development of e-discovery and sheer amount of information now stored electronically and the costs of producing it. That firms often go through thousands of emails and hard-drive files that may have nothing to do with the litigation. Sidebar 4.7 regarding discovery abuse. That discovery imposes burdens on the judicial system and takes scarce judicial resources. Additional Matters for Discussion: Review Sidebar 4.8 on data analytics and discovery Review Sidebar 4.9 on litigations holds and e-discovery. D. Motions Emphasize: That motion practice is a critical part of the litigation process. The various motions that may be made to raise issues before, during, and after the trial. The fact that a motion for a directed verdict raises issues similar to that of a motion to dismiss for failure to state a cause of action. The importance of a motion for summary judgment when there are no material facts in dispute. The distinction between a motion for summary judgment and one for a judgment on the pleading. Figure 4.2 showing examples of typical pretrial motions. E. Frivolous Cases Emphasize: That frivolous lawsuits are misunderstood by many individuals and corporations. 1-52
The importance of Rule 11 of the Federal Rules of Civil Procedure and similar state rules to control frivolous cases. Sidebar 4.10 ‗Wacky Warning Label Contest.‘ That penalties may be levied against an attorney, not only for filing a frivolous case based on subject matter, but also for filing motions or papers with the court that unduly harass or delay.
Case for Discussion: 1.
Chambers v. Nasco, Inc., 111 S.Ct. 2123 (1991). One party to a lawsuit had engaged in a pattern of abuse during the litigation. Issue: Can a judge order the abusive party to pay the other party‘s legal bills as a form of punishment? Held: Yes. This authority to penalize abuse extends not only to the litigant‘s conduct in the lawsuit, but also to other related action not directly before the court.
III. The Trial A. Jury Selection (LO 4-4) Emphasize: The steps in a trial: jury selection, opening statements, introduction of evidence, jury instruction, and closing argument. Review Figure 4.3 listing the trial steps. Sidebar 4.11 on how the internet can affect juries. The use of the peremptory challenge and note that a peremptory challenge means no cause or reason normally need to be given to excuse a prospective juror. Compare a peremptory challenge with a challenge for cause. The use of peremptory challenges to remove potential jurors because their race violates the law. That gender-based peremptory challenges are now also prohibited. Sidebar 4.12 on the jury and constitutional limits on peremptory challenges. Sidebar 4.13 on religion and peremptory challenges. Cases for Discussion: 1.
Edmonson v. Leesville Concrete Company, Inc., 111 S.Ct. 2077 (1991).
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Edmonson, a black construction worker employed by Leesville, was injured when a company-owned truck rolled backward and pinned Edmonson against some construction equipment. Edmonson sued Leesville on a negligence claim. During voir dire, Leesville used two of its three peremptory challenges to remove black persons from the prospective jury. Edmonson asked the district court judge to require that Leesville explain a race-neutral basis for striking the two jurors. The judge refused Edmonson‘s request, and a jury of eleven white persons and one black person awarded Edmonson only $18,000. Edmonson appealed. Issue: May a private litigant in a civil trial use peremptory challenges to strike potential jurors on the basis of race? Held: No. Discrimination on the basis of race in selecting a jury in a civil proceeding harms the excluded juror no less than discrimination in a criminal trial. While the Constitution‘s protections of individual liberty and equal protection apply in general only to action by the government, peremptory challenges have no significance outside a court of law. Their sole purpose is to permit litigants to assist the government in the selection of an impartial trier of fact. A private entity becomes a government actor for the limited purpose of using peremptories during jury selection. The selection of jurors represents a unique governmental function delegated to private litigants by the government and attributable to the government for purposes of invoking constitutional protections against discrimination by reason of race. 2.
J.E.B. v. Alabama Ex Rel. T.B., 114 S.Ct. 1419 (1994). At petitioner‘s paternity and child support trial, the court assembled a panel of 36 potential jurors, 12 males and 24 females. The State of Alabama used 9 of its 10 peremptory challenges to remove male prospective jurors. The court excused two male prospective jurors for cause, and the petitioner used one of its peremptory challenges to remove a male prospective juror. As a result, the trial court empaneled an all-female jury. The petitioner challenged the state‘s action. The state sought to justify the strikes because males are more sympathetic to and receptive to the alleged father in a paternity suit. On appeal, the U.S. Supreme Court found that gender classifications that rest on impermissible stereotypes violate the equal protection clause. Discrimination in jury selection causes harm to the litigants, the community, and the individual jurors who are wrongfully excluded from participating in the judicial process.
Additional Matters for Discussion: Call attention to the marginalia quote from Thomas Jefferson that he considered ―trial by jury as the only anchor yet devised by man, by which a government can be held to 1-54
the principles of its constitution.‖ Consider whether peremptory challenges should be eliminated altogether and simply seat the first set of qualified individuals in the jury pool.
B. Other Steps during a Trial Discuss: When a directed verdict may be entered. Sidebar 4.14 on technology in the courtroom. The purpose and function of jury instructions. Do not underestimate the importance of jury instructions given at the close of the case. That judges often instruct jurors to ignore testimony or events that occur in court. Is this really possible? That in most cases the instructions are read to the jury but they are not taken to the jury room. Is that practice a good idea? Figure 4.3 on the steps in a trial. Additional Matters for Discussion: Read several jury instructions at the beginning of class. Do not let the students take notes on them at the end of class, give a quiz on the instructions. Let the results point out how little jurors actually understand the instructions. Some pattern jury instructions to illustrate the way courts use them to connect the jury function (fact finding) with the law. For example, California adopted the following instructions in Products Liability cases: Products Liability—Strict Liability in Tort—Failure to Warn ―A product is defective if the use of the product in a manner that is reasonably foreseeable by the defendant involves a substantial danger that would not be readily recognized by the ordinary user of the product and the manufacturer fails to give adequate warning of such danger.‖ ―A manufacturer has a duty to provide an adequate warning to the user on how to use the product if a reasonably foreseeable use of the product involves a substantial danger that would not be readily recognized by the ordinary user.‖ ―A manufacturer has a duty to provide an adequate warning to the consumer of a product of potential risks or side effects which are known, or in the exercise of reasonable care should have been known, which may follow the foreseeable use of the product.‖ 1-55
C. Burden of Proof Emphasize: The difference between the burden of persuasion and the burden of coming forward with evidence. Sidebar 4.15 on televising jury deliberations. Additional Matter for Discussion: The different outcomes in the criminal and civil cases based upon different burdens of proof and different juries. The instructor may wish to take the students back to the cases involving O.J. Simpson many years ago to illustrate this point. Criminal Cases Emphasize: The three burdens of proof, and compare them by using the scales of justice and the extent to which they must ―tip‖ in favor of the party with the burden of proof. Contrast ―preponderance of the evidence‖ with ―beyond a reasonable doubt,‖ and note that ―clear and convincing proof‖ is in between. The purpose of a standard of proof is to instruct the fact finders concerning the degree of confidence the society thinks that it should have in the correctness of factual conclusions for a particular type of adjudication. Beyond a reasonable doubt is never used in civil cases. Civil Cases Emphasize: That in civil cases, the party with the burden of proof is subject to one of two standards: the preponderance of evidence standard or the clear and convincing proof standard. D. Deciding the Case Emphasize: The distinction between a verdict and a judgment. The importance of a judgment notwithstanding the verdict and when it may be granted. The importance of posttrial motions. Additional Matters for Discussion: Illustrate a posttrial motion by using an actual one if possible. Most motions include 1-56
everything but the kitchen sink as the losing party seeks to avoid the loss. Call attention to the marginalia that judges do not like to admit making mistakes during the trial.
IV. Posttrial Issues (LO 4-5) A. Appeals Emphasize: The fact that the appellate court reviews what transpired in the trial court to ensure its correctness but does not hold a trial hearing new evidence, nor does it make its own determination of facts. That there is great deference to the trial court, particularly on findings of fact. Sidebar 4.16 on Qualcomm and posttrial sanctions. Point out how the breakdowns in communication led to the diminished reputations of the attorneys involved. Appellate Procedures Emphasize: That appeals can be extremely expensive in both time and money—so much that it often is not economically feasible for the loser of a lawsuit to prosecute one, even if they are convinced that they would win the case on appeal. That losing parties have the right to appeal to a higher court. Table 4.1 on the litigating parties and the different names used for parties depending upon the level of appeal. Figure 4.4 on the various steps in appellate review. That in a few states, videotapes of trials are being used instead of written transcripts of the proceedings by reviewing courts. Sidebar 4.16 on appealing an evidentiary ruling. Deference to Trial Courts Emphasize: That great deference is given to the trial court in reviewing appeals. Cases for Discussion: 1.
Anderson v. City of Bessemer City, N.C., 105 S.Ct. 1504 (1985). Bessemer City decided to hire a new recreation director. A committee of four men and 1-57
one woman was responsible for choosing the director. Eight persons applied for the position. Anderson was the only woman applicant. She was a thirty-nine-year-old schoolteacher with college degrees in social studies and education. The committee chose a twenty-four-year-old male applicant who had recently graduated from college with a degree in physical education. The four men voted to offer the job to him and only the woman voted for Anderson. Anderson sued the City alleging sexual discrimination. The district court found that Anderson had been denied the position because of her sex, that she was the most qualified candidate, that she had been asked questions during her interview regarding her spouse‘s feelings about her application for the position that other applicants were not asked, and that the male committee members were biased against hiring a woman. On appeal, the Court of Appeals reversed, holding that the district court‘s findings were clearly erroneous. Issue: Did the Court of Appeals err in holding the finding of discrimination to be clearly erroneous? Held: Yes. A finding is ―clearly erroneous‖ when the reviewing court is left with the definite and firm conviction that a mistake has been committed. This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently. 2.
Icicle Seafoods, Inc. v. Worthington, 106 S.Ct. 1527 (1986). X was employed as an engineer on Board A Barge. He sued to recover overtime benefits under the FLSA. The district court held that X was a seaman because he performed work of a maritime character on navigable waters, and he was excluded from such benefits under the provision of the FLSA that excludes ―any employee employed as a seaman.‖ The Court of Appeals reversed. Reviewing under ―de novo‖ standard, the Court of Appeals found that X‘s ―dominant employment‖ was ―industrial maintenance‖ and that the ―maritime work‖ that he performed took only a small portion of his time, and therefore concluded that X was not a seaman. Issue: Should the appellate court conduct this de novo review? Held: No. The Court of Appeals erred in engaging in such fact-finding. The facts necessary to a proper determination of the legal question, whether an exemption to the FLSA applies in a particular case, should be reviewed by the courts of appeals pursuant to the ―clearly erroneous‖ standard of review set forth in Federal Rule of Civil Procedure 52(a), like the facts in other civil bench-tried litigation in federal courts.
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B. Enforcement of Judgments and Decrees Emphasize: That obtaining a judgment or decree is far different from having the judgment satisfied by the debtor or decree obeyed by the defendant. The various ways in which a judgment can be enforced in the concerned jurisdiction of the students. Include the many limitations on enforcement. That a judgment or decree cannot be enforced against a person who was not a party to the case involved, since the court had no jurisdiction over him or her. Sidebar 4.17 showing how a failure to properly provide documents during discovery could cause the court to vacate a multimillion dollars judgement and order a new trial. Additional Matters for Discussion: Review Sidebar 4.18 on how to prevent lawsuits. Are such ideas viable in the workplace? Explore other means of reducing litigation in the business environment. Point out that Chapter 5 will discuss a number of means to reduce litigation. C. Res Judicata Emphasize: That a decision is final not only as to every question actually presented, considered, and decided but also to every question that might have been presented and decided in a particular case. That res judicata means either that the case has been finally decided on appeal or that the time for appeal has expired and a cause of action finally determined by a competent court cannot be litigated by the parties in a new proceeding by the same court or in any other court. That res judicata prevents successive suits involving the same factual setting between the same parties and brings disputes to a conclusion. A matter once litigated and legally determined is conclusive between the parties in all subsequent proceedings. Case for Discussion: 1.
Cummings v. Dresher, 218 N.E.2d 688 (N.Y. 1966). There was a collision between an automobile owned by Mr. Cummings but driven by Mrs. Cummings and one driven by Bernard Dresher. Henry Dresher, the brother of the driver, was a passenger in the Dresher car. Both Bernard and Henry sued Mr. and Mrs. Cummings in the federal court for damages for their injuries. The jury in that case found 1-59
Mrs. Cummings was negligent and also found Bernard Dresher was negligent. Based upon the doctrine of contributory negligence, Bernard was not allowed to collect damages. However, Henry was awarded damages since he was not the negligent driver. Subsequently Mr. Cummings filed suit against Bernard Dresher for damages to the car sustained in the collision. This suit was brought in a state court, and Bernard Dresher sought a summary judgment on the ground of res judicata. Issue: Is a federal court decision res judicata for a later state court action involving the same parties and the same events? Held: Yes. When a full opportunity has been provided to a party in a prior action to prove his or her freedom from liability or to establish liability on the part of another, there is no reason for permitting him or her to retry those issues. In the first case, both drivers were found to be at fault. One who has had his or her day in court cannot relitigate the issues. The judgment in the first trial is conclusive.
Answers to Review Questions and Problems
Litigation—An Overview 1.
Parties Yes. It is appropriate for the original defendant, the contractor, to bring the supplier into the lawsuit as a third-party defendant. This process of impleading an additional party allows for an efficient determination of rights and duties among all affected parties.
2.
Standing to Sue a.
b.
3.
The environmentalists must be able to demonstrate how their personal interests are adversely impacted by the actions of the Interior Secretary and the National Park Service. The issue of a plaintiff‘s standing to sue should be raised by the defendant and addressed by the judge at the outset of the litigation process.
Personal Jurisdiction Attending a business meeting may not be sufficient contact to create personal jurisdiction for a lawsuit of this nature in Florida. When faced with the issue of whether it has jurisdiction under its long-arm statute, a court must ask whether the defendant‘s actions are sufficiently 1-60
connected with a state such that requiring that defendant to appear in court ―will not offend the traditional notions of fair play and substantial justice.‖ 4.
Class-Action Suits Federal cases require that members of the class be given notice of the lawsuit. Plaintiffs bringing the class-action suit must pay all court costs of action. The court looks for similarity of claims, complexity of the case, and efficiency of litigation in evaluating whether to permit the class action lawsuit.
Pretrial Procedures
5.
Pleadings The complaint is the plaintiff‘s statement of claims; the answer is the defendant‘s response. Through analysis of the complaint and answer, the issues between the parties are clarified.
6.
Steps in Discovery a. b.
7.
Surprises during the trial of a case rarely occur when discovery is thorough. Elements of discovery typically include interrogatories, requests for production, depositions, and requests for admission.
Scope of Discovery Abusive discovery practices increase costs and delay resolution of the case.
8.
Motions A trial judge legally grants a motion for summary judgment when there are no unresolved factual issues, and it is clear that the moving party is entitled to a judgment.
9.
Frivolous Cases Rule 11 sanctions may be imposed when either a party or a lawyer has filed documents intending to harass another or to cause unnecessary delays in the litigation process or to increase the costs of litigation.
The Trial 1-61
10. Jury Selection Elimination of peremptory challenges would make the jury selection process much simpler and more efficient. There would be very little need for extensive voir dire examinations. Some legal scholars argue against the total elimination of the challenges because they are nervous about not being able to remove unwanted or unqualified jurors from the panel. 11. Other Steps during a Trial Jury instructions help clarify the issues for the jury to resolve by bringing the facts and the law together in an orderly manner that will result in a decision. 12. Burden of Proof ―Beyond a reasonable doubt‖ is the burden that the government must satisfy in criminal cases. ―Preponderance of the evidence‖ is applicable in most civil cases. To carry this burden, the plaintiff must prove the case with evidence that is balanced (however slightly) in the plaintiff‘s favor. ―Clear and convincing proof‖ applies in some civil cases—such as fraud. To prove a case under this burden of proof, the plaintiff must have favorable evidence that is greater than a preponderance but less than proof beyond a reasonable doubt. 13. Deciding the Case A motion for a judgment notwithstanding the verdict is granted only when the trial judge concludes that the jury acted unreasonably in reaching its verdict. Because judges hesitate to rule that a jury acted unreasonably, these motions are seldom granted. Posttrial Issues 14. Appeals An appellate brief is a written statement supporting a legal position. Oral argument before an appellate court provides the opportunity for further explanation of the party‘s position. Questions from judges are typical during the oral argument to clarify key issues under review. 1-62
15. Enforcement of Judgments and Decrees With the court‘s assistance, a judgment may be enforced through the processes of execution, attachment, or garnishment. 16. Res Judicata The doctrine of res judicata prevents the same civil case from being retried thereby avoiding needless duplication of judicial resources.
Business Discussion #1 1.
How does discovery work? The discovery process is the bedrock of civil litigation. Through the process of discovery the parties learn about the strengths and weaknesses of the case. It comprises a pretrial exchange of information by way of various tools.
2.
Can you be required to testify twice in a deposition and at trial? Yes. As a witness, one can be required to testify in a deposition and also at trial.
3.
Should you shred all documents you have about the case? You know that some of the documents will not put the firm in the best light. The destruction of documents is never a good idea and, in some cases, may result in civil liability or criminal proceedings.
Business Discussion #2 1.
Should you have settled the case at the beginning? This question really does not have definitive yes or no answer. As a small business one must weigh the costs, time, and publicity that occur regarding litigation. Probably in this case, settling early would have been appropriate.
2.
Has your attorney been getting rich at your expense? Perhaps, but this is the nature of litigation. The attorney is doing the job that he or she has 1-63
been paid to do. As a counselor, an attorney should suggest alternatives, including settlement where appropriate. There is no indication available regarding advice provided by the attorney in this case. 3.
Is discovery more of a burden than a help? If one is going to trial, the exchange of information at the discovery stage is essential to a fair trial. Any consideration regarding settlement would have become clearer when discovery was made.
Chapter 5 Alternative Dispute Resolution Learning Objectives The purpose of this chapter is to acquaint the students with alternatives to litigation with special emphasis on conflicts, disputes, and the methods of negotiation. This chapter emphasizes the importance of ADRs to the business community. The chapter creates an awareness of finality of arbitration and the difficulty of challenging the decision of the arbitrator. Special attention is paid to the Federal Arbitration Act, which covers all agreements to arbitrate when the subject matter involves interstate commerce. An awareness of the trend toward compulsory ADR mechanisms for certain disputes is created. The presentation of the advantages, disadvantages, and procedures of mediation allow students to understand why this form of ADR is growing in popularity among businesses.
References
Bennett, S.C., Arbitration: Essential Elements. ALM Publishers (2002). Constantino, C.A. and C.S. Merchant, Designing Conflict Management Systems: A Guide to Creating Productive and Healthy Organizations. Jossey-Bass (1996). Fisher, R., W. Ury, and B. Patton, Getting to Yes: Negotiating Agreement Without Giving In, 2nd edition. Penguin Books (1991). Krivis, J., Improvisational Negotiation: A Mediator‘s Stories of Conflict about Love, Money, Anger—and the Strategies that Resolved Them. Jossey-Bass (2006). Lax, D.A. and J.K. Sebenius, The Manager as Negotiator. Free Press (1986). Lewicki, Roy J., D. Saunders, and B. Barry, Negotiation, 5th edition. McGraw-Hill/Irwin (2006). 1-64
Lipsky, D.B., R. Seeber, and R. Fincher, Emerging Systems for Managing Workplace Conflict. Jossey-Bass (2003). McCorkle, S., Mediation Theory and Practice. Pearson/Allyn and Bacon (2005). Moore, Christopher W., The Mediation Process: Practical Strategies for Resolving Conflict, 3rd edition. Jossey-Bass (2003). Shell, G.R., Bargaining for Advantages: Negotiation Strategies for Reasonable People. Penguin Books (1999). Thompson, L.L., Negotiation Theory and Research. Psychology Press (2006). Yarn, D.H., Dictionary of Conflict Resolution. Jossey-Bass (1999).
Teaching Outline I. Conflicts and Negotiation A. Conflicts and Disputes (LO 5-1) Emphasize: That conflicts are not necessarily negative and can help businesses be more productive. That disputes grow out of conflicts and need to be effectively managed so that resolution is possible. Additional Matters for Discussion: Ask the students to recall conflicts and disputes that have arisen in their professional or personal lives. Have students share these experiences and how they managed the conflicts or resolved the disputes. This may be done in small groups or with the entire class. B. Styles and Methods of Negotiation (LO 5-2) Emphasize: Sidebar 5.1 depicting the styles of negotiations through the Thomas-Kilmann Conflict Mode Instrument. The two basic methods of negotiation, which are covered in detail. Additional Matters for Discussion: Have students describe their basic approach (style) to a real-life conflict. Help students see how a person utilizes various negotiation styles depending on the situation and the relationship involved. 1-65
Review Sidebar 5.2 as an example of a typical business dispute.
C. Positional Negotiation Emphasize: The nature of this type of bargaining. That most people instinctively use this method. Additional Matters for Discussion: The limitation of this approach. Techniques or strategies used by positional negotiators. D. Principled Negotiation Emphasize: The seven elements presented in the book ―Getting to Yes.‖ How M&N and Bill‘s can be more productive in their negotiation efforts. Additional Matters for Discussion: Examples from students of when one or more of the seven elements helped them resolve a dispute. Review the Concept Summary at the end of the section with regard to conflicts in general. Communication Emphasize: Sharing customer complaints, either in general or with specificity, might help M&N locate a production operations problem. That communication involves a balance of talking and listening. Roger Fisher‘s quote in the marginalia how listening is crucial to all negotiation. Relationship Emphasize: That these parties would likely benefit by discussing how each could benefit by continuing their relationship of customer and supplier. Interests 1-66
Emphasize: That M&N might want to dissolve its sales force and concentrate on production of a variety of TVs. These interests, once communicated, may help the parties realize that a continuing relationship is in their mutual best interests. Options Emphasize: That M&N and Bill‘s should brainstorm possible options or solutions to their dispute. This exploration process is best done with the parties agreeing that an option mentioned is not necessarily a proposal for compromise. Legitimacy Emphasize: That legitimacy involves the application of accepted standards to the topic negotiated—rather than having the parties state unsupported propositions. That Bill‘s probably will not be impressed by M&N stating it will improve the quality of its TVs. Instead the parties should focus on how quality can be improved and how customers will accept the improvements. Alternatives Emphasize: That alternatives are outcomes that are possible without the agreement of the other party. That the desirable result of any negotiation is to agree on an outcome that is better than both parties‘ alternatives. Commitment Emphasize: That any successful negotiation must conclude with the parties making realistic commitments that can be put into practice. II. Alternative Dispute Resolution (ADR) Systems A. Range of Options Emphasize: 1-67
The range of dispute resolution systems represented in Figure 5.1. That these ADR systems are arranged along a spectrum of high cost (in dollars, time, emotions, and relationships) to lowest cost.
Additional Matter for Discussion: Provide examples of when parties may not want to settle a dispute and instead have the courts establish a valuable precedent. B. Settlements Emphasize: The reasons why settlement of disputes often is desirable among businesspeople. Table 5.1 listing examples of recent major settlements. Additional Matters for Discussion: Discuss one or more recent settlements covered by the news. Have students discuss why this settlement was more advantageous to the parties involved. C. Focus Groups Emphasize: What a focus group is. Why lawyers go to the time and expense of conducting a focus group. Additional Matter for Discussion: Discuss a recent example in the news of how a focus group helped disputing parties settle their case. III. Arbitration (LO 5-3, LO 5-4) A. Submissions Emphasize: That most submissions are the result of voluntary agreements. That most submissions cover both questions of law and questions of fact. That doubts about submissions are resolved in favor of arbitration. Sidebar 5.3 for examples of contracts with arbitration clauses. Sidebar 5.4 on trends in arbitration. Sidebar 5.5 for a sample arbitration clause. 1-68
Additional Matters for Discussion: That in the absence of a statute, the rights and duties of the parties to a submission are described and limited by their agreement. Whether mandatory arbitration clauses in contracts are ethical and should be valid. Sidebar 5.6 for a summary of the case of AT&T Tech, Inc. v. Communications Workers. B. Arbitrators Emphasize: That a provision in the agreement to arbitrate or in the statute that requires the arbitration describes how the arbitrator is selected. Expertise Emphasize: That experts are used as arbitrators, allowing for easier resolution of disputes. Rather than using a court‘s judicial interpretation, experts can recognize and resolve issues based on their direct knowledge of the matters in dispute. Number Chosen Emphasize: That arbitration may be conducted by a singular arbitrator or with a three-member panel. That individual arbitrators are generally chosen from an approved list of qualified arbitrators provided by an arbitration service. That the usual manner of selecting a panel of arbitrators is that each party selects one arbitrator and those two select the third. Authority over Certain Matters Emphasize: Case 5.1: Rent-A-Center, West, Inc., v. Antonio Jackson, 130 S. Ct. 2772 (2010) C. Awards Emphasize: That arbitrators do not have to explain the reasoning behind an award unless the parties require such reasoning to be explicit. 1-69
That The U.S. Supreme Court favors a broad scope of the arbitrators‘ authority. That the procedures used to have the award become enforceable through the courts.
Case for Discussion: 1.
Mastrobuono v. Shearson Lehman, Hutton, Inc. Mr. & Mrs. Mastrobuono opened an investment and trading account with Shearson Lehman Hutton, Inc. The paperwork signed to open an account contained an arbitration clause. A dispute over the handling of the Mastrobuono‘s account arose and an arbitration was held. The arbitrator awarded the Mastrobuonos $159,327 in compensatory damages and $400,000 in punitive damages. Shearson Lehman Hutton objected to the award of punitive damages. Issue: Can an arbitrator, under the terms of this arbitration clause, award punitive damages? Held: Yes. The New York law, which is applicable state law, does not prohibit the arbitrators‘ award of punitive damages. The arbitration clause and the securities industry do not exclude the award of punitive damages.
D. The Federal Arbitration Act Emphasize: The applicability of the Federal Arbitration Act. Sidebar 5.8 about the strict enforcement of a class action waiver in an arbitration agreement. Impact on Policy Emphasize: The policy favoring arbitration. Sidebar 5.7 for discussion: Wells Fargo using arbitration to derail sham account lawsuits brought by its own employees, because the customers had arbitration agreements when opining their accounts that stated that they would use arbitration if identity theft led to new accounts being opened in their name. Impact on State Laws Emphasize: 1-70
That state laws cannot prevent arbitration of disputes if the parties are engaged in or impact interstate commerce.
Cases for Discussion: 1.
Doctor’s Associates, Inc. v. Casarotto, 116 S.Ct. 1652 (1996) Doctor‘s Associates, Inc. (DAI) is the franchisor of Subway sandwich shops. Casarotto sought and was awarded a Subway franchise in Great Falls, Montana. DAI‘s franchise agreement contained an arbitration clause on page nine. A dispute arose, and Casarotto sued DAI in Montana‘s court. DAI moved to have the case stayed pending arbitration. The trial court granted DAI‘s motion. Casarotto sought review, and the Montana Supreme Court reinstated the lawsuit since the arbitration clause was invalid under Montana law. This law required arbitration clauses to appear on the first page of a contract with the clause being in capital letters and underlined. DAI was granted certiorari by the U.S. Supreme Court. Issue: When the Federal Arbitration Act conflicts with provisions of a state law, which one should be enforced? Held: According to the Federal Arbitration Act, federal laws are supreme when compared to state laws. The Federal Arbitration Act allows state laws to override an arbitration clause only if the state law voids the entire contract. Since the Montana law concerns the validity of the arbitration clause and not the entire contract, the state law cannot be enforced.
2.
Gilmer v. Interstate/Johnson Lane Corp., 111 S.Ct. 1647 (1991) Robert Gilmer worked as a financial services manager for Interstate/Johnson Lane. As a condition of this employment, Gilmer signed a contract containing a clause that all disputes with Interstate would be submitted to arbitration. Interstate terminated Gilmer‘s employment. Gilmer filed a lawsuit, and Interstate moved to dismiss the complaint on the basis that the parties must arbitrate, not litigate. The district court denied Interstate‘s motion, but the court of appeals reversed. Issue: Did Congress intend to preclude ADEA claims from being arbitrable? Held: No. Gilmer makes five arguments as to why ADEA claims should be decided by courts and not by arbitrators. All five of these arguments are rejected. The Court concludes that Gilmer failed to meet the burden of establishing that Congress intended to 1-71
preclude arbitration of claims under ADEA. 3.
Rodriguez de Quijas v. Shearson/American Express, Inc., 109 S.Ct. 1917 (1989) An investor signed a contract containing an agreement to arbitrate any claims made against the broker. This investor lost funds and sued the brokerage firm for violation of the federal securities law. Issue: Does the section (§14) of the 1934 Securities Exchange Act that allows the investor ―the right to select the judicial forum‖ for his claims prevent an agreement to arbitrate? Held: No. By interpreting the FAA‘s policy to favor arbitration, the Justices feel comfortable enforcing the parties' agreement to arbitrate any claims and disputes that arise.
Additional Matter for Discussion: Case 5.2: 14 Penn Plaza, LLC. V. Pyett, 129 S. Ct. 1456 (2009). E. Statutorily Mandated Arbitration Emphasize: That a growing number of states have adopted statutes that require mandatory arbitration for certain types of disputes. That the arbitrators in the mandatory arbitration process are retired judges and practicing lawyers, usually experienced trial attorneys. Additional Matters for Discussion: Some states have established a mechanism for binding arbitration of attorney-client fee disputes. Lawyers are required to submit any fee dispute to arbitration at the client‘s request. There is no denial of the right to a trial by jury. The establishment of the fee dispute resolution process is within a court‘s inherent power to regulate the bar. Some critics argue that arbitrators who are lawyers tend to side with their fellow lawyers in legal-fee cases. A New York Lemon Law statute, as well as statutes in other states, requires auto manufacturers to arbitrate motor vehicle defect claims at the buyer‘s option. Types of Cases Emphasize: 1-72
That mandatory arbitration statutes cover only a few types of cases. A typical statute might apply the procedure to claims exclusively for money of a small amount, such as those for less than $15,000, not including interest and costs. That arbitration is required only in those cases in which a party has demanded a jury trial, as it can be assumed that a judge hearing a case is basically as efficient as an arbitrator.
Procedures Emphasize: That the usual procedure for a claim filed in court that is covered by the mandatory arbitration law is to place the claim in the arbitration track at time of filing. That discovery procedures may be used prior to the hearing on arbitration. That the arbitrators have the power to determine the admissibility of evidence and to decide the law and the facts of the case. F. Voluntary/Contract-Based Arbitration Emphasize: That voluntary arbitration is providing more submissions than is mandatory arbitration. That this type of arbitration may arise from predispute contractual arbitration clauses or from a postdispute arbitration agreement. The issue presented in Sidebar 5.9 regarding class actions and single claims. G. Judicial Review (LO 5-5) Emphasize: That the arbitration process is less time consuming and less costly than litigation only if the parties are limited in seeking judicial review of the arbitrators‘ awards. Additional Matters for Discussion: The reasons for broader review in case of statutory mandatory arbitration. Discuss the Concept Summary contrasting the differences between Voluntary versus Mandatory Arbitration. Sidebar 5.11 with recent Supreme Court decisions‘ impact on arbitration law. Review of Voluntary/Contract-Based Arbitration Awards Emphasize: The reasons that judicial review is very limited. 1-73
That the arbitrator‘s findings on questions of law and fact are conclusive. That if the scope of an arbitration clause is debatable or reasonably in doubt, the clause is construed in favor of arbitration. An erroneous view of the law, no matter how egregious, is binding because the parties have agreed to accept the arbitrator‘s view of the law. Arbitration awards are not vacated merely because a court may believe that the arbitrators erred. That a reviewing court cannot reject an award simply because that court bases public policy on general considerations of presumed public interests. Sidebar 5.10 labeled ―Judicial Review of Arbitrator‘s Award.‖ Emphasize the courts role and that if an arbitrator makes a mistake, the case should be remanded, not resolved on its merits by the courts. When a de novo judicial review can be sought.
Review under the Federal Arbitration Act Emphasize: The four grounds for setting aside an arbitrator‘s award under Section 10. IV. Mediation (LO 5-3, LO 5-4) Emphasize: That parties in a mediation are the decision makers; mediators provide a procedure of facilitated negotiation; and the parties are responsible for finding a solution to the dispute. That mediation often allows disputing parties to preserve or reestablish relationships. The comment in the marginalia that mediation has become the primary ADR method in federal courts. A. Procedures Emphasize: Sidebar 5.12 revisiting the example of Bill‘s and M&N, originally found in Sidebar 5.2 The steps used in a typical mediation by using Sidebar 5.13. The benefits and detriments of caucuses. B. Advantages/Disadvantages Emphasize: The benefit of parties controlling their dispute resolution system. 1-74
The need for disputing parties to agree on one person to mediate.
Additional Matters for Discussion: The distinction between arbitration and mediation. The role of the Federal Mediation and Conciliation Service and other similar organizations in resolving labor-management relations. The fact that mediation is not always successful in having disputing parties resolve their differences. C. Lack of Judicial Involvement (LO 5-5) Emphasize: The positive aspect of mediation in that there is no need for a court to review the agreement or lack of agreement of the parties. That mediations do not involve the legal issues found in the arbitration process. D. Combination with ADR Systems (LO 5-4) Emphasize: How mediation is flexible enough to be used in a variety of circumstances. That this flexibility allows mediation to be combined with arbitration to form various ADR systems. Additional Matters for Discussion: That, at this time, there are no uniform training programs for mediators and how this fact should make parties cautious in selecting a mediator. That some laws encourage the parties to be creative in utilizing ADR systems.
Answers to Review Questions and Problems
Conflicts and Negotiation 1.
Conflicts and Disputes A conflict exists whenever there are two or more points of view. This definition allows one to say that conflicts are everywhere and always present. A dispute arises when one party makes a demand on another party, and that party rejects or ignores the demand.
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2.
Styles and Methods of Negotiation The five styles of negotiation people instinctively use are avoiding, accommodating, competing, compromising, and collaborating.
3.
Positional Negotiation Generally, the price and quantity of items involved will dominate negotiations. Then parties will focus on when the price will be paid and items delivered.
4.
Principled Negotiation a. The seven elements developed by the authors of Getting to Yes include communication, relationship, interests, options, legitimacy, alternatives, and commitments. b. Focusing on these elements typically will help disputing parties discover things they have in common and expand the scope of potential solutions.
Alternative Dispute Resolution (ADR) Systems 5.
Range of Options Typically found on a spectrum of ADR systems are focus groups, arbitration, and mediation.
6.
Settlements The litigation process typically interferes with, if not destroys, opportunities for ongoing working relationships. Also many businesses fear that jurors may be biased in favor of the other party; thus, businesses would prefer to settle than rely on the outcome of a jury verdict.
7.
Focus Groups Parties and lawyers can discover the ―jury‘s‖ perceptions of the strengths and weaknesses of the case.
Arbitration 8.
Submissions a.
A submission is the process of the parties asking for their dispute to be arbitrated. It 1-76
b.
9.
begins the arbitration process. If there is a dispute about whether a matter must be arbitrated, the courts decide how to resolve this dispute.
Arbitrators The arbitration agreement will provide the scope and authority that the arbitrator possesses. If a delegation clause is included in the agreement authorizing the arbitrator to make determinations regarding the validity of the agreement, the arbitrator will be authorized to make the determination. See: Rent-a-Center v. Antonio Jackson on page 131. If no such delegation clause exists, the judge will make the determination.
10. Awards An award generally is valid if the arbitrator simply responds to the issues stated in the submission. There is no required form of an award. 11. The Federal Arbitration Act a. b.
This dispute between the partners will be submitted to arbitration, and the lawsuit will be stayed pending the outcome of the arbitration. As a federal law, the FAA is supreme, and the state law preferring litigation will be ignored.
12. Statutorily Mandated Arbitration a. b.
Statutorily mandated arbitration refers to those matters that must be arbitrated rather than litigated since state law requires arbitration. No. Sometimes litigation is acknowledged as the more appropriate method of resolving a dispute.
13. Voluntary/Contract-Based Arbitration In Green Tree Financial Corp.-Ala. v. Randolph, 121 S. Ct. 513 (2000), the court found that Randolph‘s agreement to arbitrate is not rendered unenforceable simply because it says nothing about arbitration costs, and thus fails to provide her protection from potentially substantial costs of pursuing her federal statutory claims in the arbitral forum. 14. Judicial Review
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a.
b.
Since in a voluntary arbitration the parties willingly forego use of the courts, they are not entitled to a judicial review of the award. Statutory-mandated arbitration must be reviewed by the courts upon the request of a party since the parties had no choice but to submit their dispute to arbitration. No. If the award is within the submission and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court will not set it aside for error, either in law or fact. A contrary course would be a substitution of the judgment of the court in place of the arbitrators chosen by the parties, and would make an award during the commencement, not the end, of litigation. Taylor v. Fitz Coal Company, Inc., 618 S.W.2d 432 (Ky. 1981).
Mediation 15. Procedures The mediation normally begins with the mediator‘s opening statement. Each party then tells their story. Parties are encouraged to discuss their situation and brainstorm possible options or solutions. The mediator moves the parties towards commitments, the drafting of an agreement, and the signing of such a document. During this process, a mediator may wish to visit with one party away from the others. These private sessions are called caucuses. 16. Advantages/Disadvantages a. b.
In a mediation, the parties maintain control over whether to settle or not. Advantages of mediation include that parties control the decision making, time and expense usually are reduced significantly, informality of the process may aid in reaching a resolution, and the underlying conflict (not just the dispute) may be resolved. Disadvantages of mediation include that there is no assurance that a resolution will occur, the fact that the parties may not show up or may not actively pursue a resolution, and the parties may have a difficult time selecting a mediator.
17. Lack of Judicial Involvement Judicial supervision of mediation is minimal because the parties reach their own agreement or decide to suspend the mediation process. 18. Combination of ADR Systems Often times disputing parties may agree to mediate first and then arbitrate any disputes not 1-78
resolved in the mediation.
Business Discussion #1 1.
What are possible alternative dispute resolution systems (ADRs)? Arbitration and mediation are the two most commonly used ADRs. Others include various combinations of these ADRs, mock and minitrials, and negotiation.
2.
Should employees be required to sign a contract that an ADR method will be used before any lawsuit is filed against the organization? From the business‘s point of view, it is advantageous to seek ADR rather than submitting conflicts to litigation.
Business Discussion #2 1.
What steps should you take to discover, in the most accurate and efficient manner, the reasons customers are filing complaints? Possible steps include having the sales force survey customers. One also should contact the production and inspection staff to learn whether issues related to operations are causing defective products to be shipped.
2.
What is the distinction between mediation and arbitration? Mediation and arbitration are two commonly used ADRs. In a mediation, a third party facilitates the parties to negotiate and agree or disagree on whether both parties would like to retain the decision. In an arbitration, the parties give a third party the authority to make a decision binding the parties to a resolution.
3.
Should your company’s sales contracts include a clause that requires the parties to attempt resolution of dispute by mediation? By arbitration? By some other mechanisms? Sales contracts containing some form of ADR may help discourage litigation and encourage the resolution of conflicts and disputes. Which type of contractual clause to include depends on the desires of the contracting parties. It is believed that mediation clauses will grow in popularity.
4.
If your company’s sales contracts did include a dispute resolution (other than litigation) 1-79
clause, when can the courts still be used? While there is no statutory prohibition in having customers and employees sign such agreements, the courts have restricted the enforcement of these clauses.
Business Discussion #3 1.
What is the difference between a conflict and a dispute? There are many definitions of the words conflict and dispute. Some people even use these terms as synonyms. In this chapter, the terms are distinguished. Conflicts, which are ubiquitous, exist whenever two or more people differ in a point of view. Conflicts also exist within one person when two different options for action coexist. A dispute arises from a conflict when one person makes a claim and another person denies the claim made. Thus, conflicts lead to disputes, and disputes lead to the need for dispute resolution systems.
2.
What steps should you take to discover, in an accurate and efficient manner, the reasons conflicts and disputes exist? There is no simplistic answer that results in the effective management of every conflict and the efficient resolution of every dispute. Because people are at the heart of every conflict and dispute, each situation is unique. This chapter presents several points of view regarding conflict management and dispute resolution. A common aspect among effective managers is finding sufficient time to listen carefully to discover what really is most important to the parties involved.
3.
Should your consulting firm’s contracts with employees contain a dispute resolution clause? What about the firm’s consulting agreement with clients? If so, what system of dispute resolution should be included? The answer to the first two questions is yes. Since the continuation of the employment and client relationship likely is desired, a mediation clause probably is most reasonable.
Chapter 6 The Constitution 1-80
Learning Objectives
This chapter introduces the basic concepts of the Constitution and how they create authority for the framework of the federal government. Emphasis is placed on the role of the Contracts Clause in business. It then introduces the student to the major amendments to the Constitution. Finally, the chapter analyzes the basic protections created in the First, Second, and Fourteenth Amendments.
References
The Declaration of Independence and the Constitution of the United States. Georgetown University Press (2003). Aman, A.C., Aman and Mayton‘s Handbook on Administrative Law, 2nd Edition. West Publishing (2001). Barendt, E.M., Freedom of Speech. Oxford University Press (2005). Cookson, C., Encyclopedia of Religious Freedom. Routledge (2003). George, R.P., Great Cases in Constitutional Law. Princeton University Press (2000). Hargreaves, R., The First Freedom: A History of Free Speech. Sutton (2002). Hartmann, T., Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights. St. Martin‘s Press (2002). Labunski, R.E., James Madison and the Struggle for the Bill of Rights. Oxford University Press (2006). Levinson, N., Outspoken: Free Speech Stories. University of California Press (2003). Levy, L.L., Origins of the Bill of Rights. Yale University Press (1999). Meyer, H.N., The Amendment that Refused to Die: Equality and Justice Deferred: The History of the Fourteenth Amendment. Madison Books (2000). Orth, J.V., Due Process of Law: A Brief History. University Press of Kansas (2003). Parpworth, N., Constitutional and Administrative Law. Oxford University Press (2006). Riley, D. and B. Brophy-Baermann, Bureaucracy and the Policy Process: Keeping the Promises. Rowman & Littlefield (2006). Schuck, P., Schuck‘s Foundation of Administrative Law, 2nd Edition. West Publishing (2003). Stillman, R.J., The American Bureaucracy: The Core of Modern Government. Wadsworth/Thompson Learning (2004). Stoner, J.R., Common-Law Liberty: Rethinking American Constitutionalism. University Press of Kansas (2003). Tushnet, M.V., A Court Divided: The Rehnquist Court and the Future of Constitutional 1-81
Law. W.W. Norton Co. (2005). Watry, R.A., Administrative Statutory Interpretation: The Aftermath of Chevron v. Natural Resources Defense Council. LFB Scholarly Publications (2002).
Teaching Outline
I. Basic Concepts A. Separation of Powers (LO 6-1) Emphasize: That a lesser emphasized separation of powers is that between the federal government and governments at the state and local levels. The concept of federalism. The importance of the Tenth Amendment. B. Supremacy Clause (LO 6-2) Emphasize: That Article VI makes it clear that the Constitution is supreme over all laws and that federal law is supreme over a state law or local ordinance. The reasons behind federal supremacy. That the Supremacy Clause is not a source of federal rights. Rather it secures federal rights created elsewhere by giving them priority whenever they come in conflict with state law. Preemption Emphasize: The meaning and purpose of preemption. Sidebar 6.1—―Examples of State Laws Preempted by Federal Law.‖ The example regarding Watters v. Wachovia Bank NA, 127 S.Ct. 1559 (2007). Cases for Discussion: 1.
Geier v. American Honda Motor Company, Inc., 120 S.Ct. 1913 (2000).
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Geier sued American Honda Motor Company, Inc. after she sustained injuries when her 1987 Honda collided with a tree. Geier‘s car had shoulder and lap belts but no airbags. Geier claims that Honda should have equipped the car with airbags and is liable because it did not. Honda relies on federal statutes and regulations to absolve it from liability since the federal authorities did not require, but permitted, the installation of airbags in 1987 model cars. Issues: Does the National Traffic and Motor Vehicle Safety Act of 1966 preempt Geier‘s lawsuit? Does the 1984 version of the Federal Motor Vehicle Safety Standard (FMVSS 208) preempt Geier‘s suit? Held: No and Yes. The 1966 Act does not preempt the lawsuit because it has a savings clause that ―does not exempt any person from liability under common law.‖ There exists a conflict between the FMVSS 208 safety standard allowing manufacturers discretion whether to install airbags in 1987 models and a lawsuit claiming the manufacturer is liable for failing to install airbags. The conflict is resolved by finding that the federal safety standard preempts the state-based lawsuit. 2.
Barnett Bank of Marion County, N.A. v. Nelson, 116 S.Ct. 1103 (1996). Barnett Bank bought a Florida licensed insurance agency. The State of Florida Insurance Commissioner ordered Barnett Bank to stop selling insurance. Florida law prohibits any bank that is affiliated with other banks from selling insurance. Barnett Bank sought a declaratory judgment that the federal law preempts Florida‘s law. A 1916 federal law allows banks in small towns (with less than 5,000 in population) to sell insurance. Issue: Does the federal law preempt the Florida law? Held: Yes. There is a conflict between the meaning of the federal and Florida laws. This conflict cannot be reconciled by enforcing both laws. The federal law preempts the Florida law under the Supremacy Clause.
3.
New York Blue Cross Plans v. Travelers Inc., 115 S.Ct. 1671 (1995). A New York statute requires hospitals to collect a surcharge from patients covered by certain commercial insurers and HMOs. Insureds under Blue Cross/Blue Shield plans were not subject to the surcharge. Several insurance companies and HMOs brought this action contending that the Employee Retirement Income Security Act of 1974 (ERISA) preempted the area of health insurance when such coverage is 1-83
purchased by an employee health-care plan governed by ERISA. Issue: Are the health plans subject to the New York law sufficiently related to employee benefit plans to fall within ERISA‘s preemption? Held: No. New York‘s surcharges affect only indirectly the relative prices of insurance policies. This result is no different from many state laws in areas traditionally subject to local regulation. Congress could not possibly have intended to eliminate all of these areas of regulation. 4.
Garcia v. San Antonio Metropolitan Transit Authority, 105 S.Ct. 1005 (1985). The U.S. Labor Department sought to enforce minimum wage and overtime pay standards against the mass transit system in San Antonio, Texas. The case sought a reversal of National League of Cities. Issue: Does the federal law apply to these employees of a local transit system? Held: Yes. Public transit authorities are required to comply with the overtime provisions of federal law pursuant to congressional power to regulate interstate commerce.
5.
Capital Cities Cable, Inc. v. Crisp, 104 S.Ct. 2694 (1984). The FCC regulates cable television. Oklahoma prohibited the broadcasting of advertisements for alcoholic beverages. Issue: Does the FCC preempt state regulation of TV advertising? Held: Yes. Under supremacy clause, enforcement of state regulation may be preempted by federal law in several circumstances, i.e., first, when Congress, in enacting federal statute has expressed clear intent to preempt state law, second, when it is clear, despite absence of explicit preemptive language, that Congress has intended, by legislating comprehensively, to occupy the entire field of regulation and has thereby left no room for states to supplement federal law, and, finally, when compliance with both state and federal law is impossible or when state law stands as an obstacle to accomplishment and execution of full purposes and objectives of Congress.
6.
Perez v. Campbell, 91 S.Ct. 1704 (1971). 1-84
Arizona had a statute that provided for the suspension of licenses of drivers who were unable to satisfy judgments even if bankrupt. P had filed a voluntary petition in bankruptcy and had duly scheduled a judgment debt arising out of a traffic accident. The court in bankruptcy discharged P. P filed a complaint seeking to retain a driver‘s license. Issue: Is the Arizona law in conflict with the federal bankruptcy law? Held: Yes. The Arizona statute is unconstitutional. The two provisions are in direct conflict. The purpose of the Bankruptcy Act is to give debtors new opportunity unhampered by the pressure and discouragement of preexisting debt. The challenged state statute stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. II. Federal Government’s Authority to Regulate Business—The Commerce Clause (LO 63) Emphasize: That the commerce clause can be found in Article 1, Section 8, of the United States Constitution. A. Regulation of Foreign Commerce Emphasize: That the power to regulate foreign commerce is vested exclusively in the federal government, and it extends to all aspects of foreign trade. B. Regulation of Interstate Commerce Emphasize: That the Commerce Clause prohibits one state from interfering with commerce that crosses state lines. That the case of Gibbons v. Ogden stands for the proposition that states cannot impede interstate commerce. C. Impact on Interstate Commerce Emphasize: That the power of Congress over commerce is very broad; it extends to all commerce, 1-85
be it great or small. D. Limitation on Federal Authority Emphasize: The two perspectives from which this topic requires examination. Sidebar 6.2—―Federalism and State Rights under the Commerce Clause‖ and how doctor assisted suicide was decriminalized in Oregon. Additional Matters for Discussion:
The limits of the federal government‘s power under the Commerce Clause as discussed in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), which upheld the Patient Protection and Affordable Care Act (Obamacare) on other grounds.
E. Contract Clause Emphasize: That the clause does not apply to actions by the federal government that impair the obligation of contracts. That under the contract clause, states cannot enact laws that impact rights and duties under existing contracts. That the limitation on state action impairing contracts has not been given a literal application. Additional Matters for Discussion: Factors that may justify a state law that impairs private contract rights are: o The law is enacted in an emergency situation. o The law is broad to protect basic societal interests. o The relief is properly tailored to meet those interests. o The conditions of the law are reasonable. o The law is limited to the duration of an emergency. Cases for Discussion: 1.
Pension Ben. Guar. Corp. v. R.A. Gray & Co., 104 S.Ct. 2709 (1984). In 1980, Congress amended ERISA to require employers withdrawing from a multiemployer pension plan to pay a fixed amount to cover unfunded benefits. The law was made retroactive. 1-86
Issue: Is this application constitutional under the contract clause? Held: Yes. The contract clause does not apply, either by its own terms or by convincing historical evidence, to actions of the national government. 2.
Energy Reserves Group, Inc. v. Kansas Power & Light Co., 103 S.Ct. 697 (1983). A state regulation restricted the income of a utility. Issue: Is this state regulation a violation of the contract clause? Held: No. The law does not necessarily constitute substantial impairment for purposes of the contract clause. If a substantial impairment is found, the state, in justification, must have a significant and legitimate public purpose behind the regulation. Once such a purpose has been identified, the adjustment of the contracting parties' rights and responsibilities must be based upon reasonable conditions and must be of a character appropriate to the public purpose justifying the legislation's adoption.
III. State and Local Government’s Authority to Regulate Business—Police Powers Emphasize: State and local government authority arises from a concept known as ―police powers.‖ oPolice powers can be summarized as requiring state legislation and regulation to protect the public‘s health, safety, morals, and general welfare. A. Limitation of Police Powers Emphasize:
What the ―Dormant Commerce Clause‖ is and that some areas of regulation are exclusively federal, some are said to be exclusively state, and still other are such that regulation of them may be dual. Exclusively Federal—The subject area that is exclusively federal concerns those internal matters where uniformity on a nationwide basis is essential. Any state regulation of such subjects is void whether Congress has expressly regulated the area or not. Exclusively State—Those matters that are exclusively within the states‘ power are intrastate activities that do not have a substantial effect on interstate commerce (at least in theory). Dual Regulation Between the two extremes, joint regulation is permissible. 1-87
Sidebar 6.3 which shows how state protectionism may be challenged, discussing a Tennessee statute requiring that a person obtaining a retail alcohol license must have lived in Tennessee for two years.
IV. Amendments and Basic Protections (LO 6-4) Emphasize: Table 6.1 showing the first fourteen amendments to the U.S. constitution. The four basic characteristics of constitutional guarantees, and give examples: o Constitutional rights are not absolute. o Constitutional issues often involve a weighing process between competing policies. o Constitutional rights exist to remove certain issues from the political process and the ballot box. o Constitutional rights vary from time to time. A. First Amendment Protections (LO 6-5) Freedom of Religion Emphasize: That the First Amendment of freedom of religion has two aspects: the establishment clause and the free exercise clause. That if a law is based on economic considerations, it may be upheld if its classifications are reasonable and in the public interest. Sidebar 6.4 regarding how the IRS defines churches. Sidebar 6.5 discussing Burwell v. Hobby Lobby, 573 US. 682 (2014), and whether businesses can invoke religious objections to avoid covering contraception in their health care plans. Cases for Discussion: 1.
Frazee v. Illinois Department of Employment Security, 109 S.Ct. 1514 (1989) Frazee refused a temporary position offered to him by Kelly Services because the job would have required him to work on Sunday. He was denied unemployment compensation benefits since he was not a member of an established religious sect or church and did not claim that his refusal to work resulted from a tenet, belief, or teaching of an established religious body.
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Issue: Does the denial of compensation constitute a violation of the Free Exercise Clause? Held: Yes. While membership in a sect would simplify the problem of identifying sincerely held beliefs, the notion that one must be responding to the commands of a particular religious organization to claim the protection of the Free Exercise Clause is rejected. The fact that Sunday work has become a way of life does not constitute a state interest sufficiently compelling to override a legitimate free exercise claim, since there is no evidence that there will be a mass movement away from Sunday employment if appellant succeeds on his claim. 2.
Thomas v. Review Bd. of Indiana Employment Sec., 100 S.Ct. 1425 (1981). Plaintiff, a Jehovah witness, was initially hired to work in his employer‘s roll foundry, but when the foundry was closed, he was transferred to a department that fabricated turrets for military tanks. The plaintiff asserted that his religious beliefs prevented him from participating in the production of weapons. His employer offered no other non-war production jobs. The plaintiff requested to be laid off, but when his request was denied, he quit. The plaintiff subsequently applied for but was denied unemployment compensation. Indiana state law requires applicants for unemployment compensation to show that they left work for a good cause in connection with the work. Issue: Is the denial a violation of the First Amendment? Held: Yes. When the state conditions receipt of an important benefit upon conduct proscribed by a religious belief, thereby putting substantial pressure on an adherent to modify his behavior and to violate his beliefs, a burden upon religion exists. The state may justify an inroad on religious liberty by showing that it is the least restrictive means of achieving some compelling state interest. However, only those interests of the highest order can overbalance legitimate claims to the free exercise of religion. The interests advanced by the state to avoid widespread unemployment and to avoid a detailed probing by employers into job applicant‘s religious beliefs do not justify the burden placed on free exercise of religion.
Other Important Freedom of Religion Cases: 1.
Jimmy Swaggart Industries v. Board of Equalization of California, 110 S.Ct. 688 (1990)
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California‘s imposition of its general 6 percent sales and use taxes on religious merchandise sold in the state by religious organizations does not violate the First Amendment. A generally applicable sales and use tax, which is not a flat license tax, which constitutes only a small part of the sale price, and which is applied neutrally without regard to the nature of the seller or purchaser, does not place an onerous burden on religious activity. 2.
Hobbie v. Unemployment Appeals of Florida, 107 S.Ct. 1046 (1987). When a state denies the receipt of a benefit because of conduct mandated by religious belief, a burden on the exercise of religion exists. Not only is it apparent that Hobbie‘s declared ineligibility for benefits derived solely from the practice of religion, but also the pressure on her to forego that practice (not working on her Sabbath) is unmistakable. The First Amendment protects the free exercise rights of employees who adopt religious beliefs or convert from one faith to another after they are hired. The timing of Hobbie‘s conversion is immaterial to our determination that her free exercise rights have been burdened.
3.
Thornton v. Caldor, 105 S.Ct. 2914 (1985). A Connecticut statute that provided Sabbath observers with absolute and unqualified right not to work on their Sabbath violated the establishment clause. It imposed on employers and employees an absolute duty to conform their business practices to a particular religious practice of the employee by enforcing observances of the Sabbath the employee unilaterally designated.
4.
United States v. Lee, 102 S.Ct. 1051 (1982). The payment of social security taxes and the receipt of benefits do not interfere with the Free Exercise rights of the Amish.
Freedom of Speech Emphasize: That the Amendment protection does not apply to private action. That free speech also covers conduct or actions considered symbolic speech. That ―fighting words‖ are not protected speech. The difficulty in defining obscenity. The proper inquiry, in deciding whether allegedly obscene materials have any ―literary, artistic, political, or scientific value.‖ Sidebar 6.6—―Art and Obscenity‖ 1-90
Sidebar 6.7—―The FCC is Not Amused‖ Sidebar 6.8—―Picketing as Free Speech‖ Sidebar 6.9—― When Does a Communication Become a Threat Unprotected by the First Amendment?‖ Case 6.1: Snyder v. Phelps. 131 S.CT. 1207 (2011)
Commercial Speech Emphasize: That the protection of commercial speech was a major constitutional development during the latter part of the 20th century (since 1970). Sidebar 6.7—―The FCC Is Not Amused‖ Sidebar 6.10 concerning Cigarette warning labels. Case 6.2: Brown v. Entertainment Merchants Association, 564 U.S. 786 (2011). Cases for Discussion: 1.
Greater New Orleans Broadcasting Association, Inc. v. United States, 119 S.Ct. 1923 (1999). The Federal Communications Commission (FCC) seeks to prohibit the advertising of lotteries by radio and television stations in Louisiana since these ads may be heard or seen in neighboring Texas and Arkansas where lotteries are illegal. The Greater New Orleans Broadcasting Association seeks to have the FCC restrictions declared in violation of the First Amendment‘s protection of commercial speech. Issue: Are the FCC restrictions sufficiently narrow in scope to meet constitutional requirements? Held: No. The Supreme Court reaffirms the four-step analysis announced in Central Hudson. The Court rejects the FCC‘s argument that its restrictions on lottery advertising are sufficiently narrow. The advertiser and the listening/viewing public, not the government, should be allowed to assess the value of accurate and nonmisleading information about lawful conduct.
2.
44 Liquormart, Inc. v. Rhode Island, 116 S.Ct. 1495 (1996). The State of Rhode Island allows advertising of alcoholic beverages prices only in the stores where the alcohol is sold. State law bans such advertising ―outside the licensed premises.‖ 44 Liquormart, Inc., a licensed retailer, ran a newspaper ad 1-91
stating the low prices at which peanuts, potato chips, and Schweppes mixers were being offered, identifying various brands of packaged liquor, and including the word ―WOW‖ in large letters next to pictures of vodka and rum bottles. As a result of this ad, the Rhode Island Liquor Control Administrator assessed 44 Liquormart a fine of $400. Liquormart paid the fine and sought a declaratory judgment in Federal District Court that the Rhode Island law prohibiting off-premise advertising was in violation of the First Amendment‘s free speech protection. Issue: Is the Rhode Island limitation on alcohol pricing advertisements unconstitutional? Held: Yes. Rhode Island failed to produce credible evidence that its restriction on advertising of alcohol prices reduced consumption of alcohol. There are other, perhaps more effective, methods of regulating the use of alcohol. A ban on truthful, non-misleading commercial speech is not supported under these facts. 3.
Rubin v. Coors Brewing Co., 63 U.S.L.W. 4319 (1995) The Federal Alcohol Administration Act prohibits beer labels from displaying the alcohol content. Coors proposed to include such content on its label, and the Bureau of Alcohol, Tobacco and Firearms refused to grant Coors‘s application for this label. Issue: Is this restriction a violation of Coors‘s First Amendment rights? Held: Yes. To regulate commercial speech that is truthful and not misleading, the government‘s interest must be substantial and directly related to the interest being sought. Here, the government‘s concern to limit ―strength wars‖ between breweries is substantial. However, restricting the contents of the labels on beer cans will do little good when the breweries are allowed to advertise the alcohol content of their beer in other ways. Thus the label restrictions are in violation of the First Amendment.
4.
Lebron v. National Railroad Passengers Corp., 115 S.Ct. 961 (1995) The National Railroad Passenger Corporation (Amtrak) refused to accept Lebron‘s billboard display for an Amtrak-owned billboard in Penn Station. Amtrak‘s reason for refusing this ad was due to its political nature. (This ad was an electronic billboard criticizing Coors Brewing Company involvement in supporting the Nicaraguan Contras.)
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Issue: Is Amtrak a governmental agency support to the First Amendment? Held: Yes. Amtrak is an agency or instrumentality of the United States for the purpose of individual rights guaranteed by the Constitution. Freedom of the Press Emphasize: That the publishing business is the only organized private business that is given explicit constitutional protection. Sidebar 6.11—―WikiLeaks, Edward Snowden, and the freedom of the press‖ What defamation and libel mean. The contrast between prior restraint and the impositions of sanctions for publishing material in violation of law. Cases for Discussion: 1.
Arkansas Writers’ Project, Inc. v. Ragland, 107 S.Ct. 1722 (1987) The Arkansas sales tax applies to general interest magazines but exempts newspapers and religious, professional, trade and sports journals. Issue: Does the application of the sales tax to some but not all publications violate the First Amendment? Held: Yes. The law violates First Amendment‘s freedom of the press guarantee; even though there was no evidence of an improper censorial motive.
2.
Philadelphia Newspapers, Inc. v. Hepps, 106 S.Ct. 1558 (1986) A newspaper published a series of articles suggesting that plaintiff had ties to organized crime. Plaintiff, the principal stockholder of a corporation that franchises convenience stores, brought a defamation suit against the newspaper. Issue: Should a private figure plaintiff involved in matters of public concern show that the alleged defamatory statements were false and the defendants were at fault? Held: Yes. The common law‘s rule of falsity—that the defendant must bear the burden of proving truth—must fall here to a constitutional requirement that the plaintiff bear the burden of showing falsity, as well as fault, before recovering 1-93
damages. 3.
Seattle Times Co. v. Rhinehart, 104 S.Ct. 2199 (1984) A newspaper, which was defending a libel suit filed against it by a religious organization, was prohibited from publishing information it obtained during discovery relating to the foundation‘s members and donors. Issue: Is this prohibition constitutional? Held: Yes. A protective order that prohibits a civil litigant‘s publication of information obtained in pretrial discovery does not violate the First Amendment. Litigants have no First Amendment right of access to information made available only for the purpose of trying a lawsuit. Such protective orders, however, apply only to information obtained through discovery and do not preclude the litigant from disseminating identical information obtained through different channels.
Examples of Laws Violating Free Speech: 1. Community cannot ban use of residential signs. City of Ladue v. Gilleo, 114 S.Ct. 2038 (1994). 2. A local ordinance in Forsyth County, Ga., required permit applicants to pay fees of as much as $1,000, based on the estimated police and administrative costs associated with their protests or marches. The Forsyth County ordinance violated the First Amendment because it gave officials considerable discretion to set permit fees based on how much opposition a demonstration is expected to stir up. Forsyth County v. Nationalist Movement, 112 S.Ct. 2395 (1992). 3. A St. Paul ordinance made it a crime to burn a cross or do other acts that can arouse ―anger, alarm or resentment‖ on the basis of race, religion, or gender. The law wrongly singled out for censorship the expression of particular ideas. However objectionable those ideas might be, ―The First Amendment does not permit St. Paul to impose special prohibitions on those speakers who express views on disfavored subjects.‖ R.A.V. v. City of St. Paul, 112 S.Ct. 2538 (1992). 4. Congress enacted a total ban on indecent dial-a-porn messages—that is, sexually explicit or suggestive messages provided for a fee over the telephone. Congress may ban dial-a-porn telephone messages that are ―obscene,‖ but that lawmakers went too far in also totally banning phone communications deemed merely ―indecent.‖ Sable Communications of California Inc. v. Federal Communications Commission, 109 S.Ct. 2829 (1989). Examples of Law That Do Not Violate Free Speech: 1-94
1. 2.
3.
Farmers can be required to contribute financially to the costs of generic advertising. Glickman v. Wileman Brothers & Elliott, Inc., 117 S.Ct. 2130 (1997). States may bar nightclub-style nude dancing under a public-indecency law. It is not protected expressive conduct. The law furthers a substantial government interest in protecting order and morality. Barnes v. Glen Theatre, 111 S.Ct. 2456 (1991). State universities may ban commercial solicitation in student dormitory rooms. Governmental regulation of commercial speech does not have to be accomplished by the least restrictive means available. As long as such regulation is narrowly tailored to achieve significant governmental interests, any reasonable ―fit‖ between the government‘s ends and the means chosen to reach them will satisfy the First Amendment. Board of Trustees of the State University of New York v. Fox, 109 S.Ct. 3028 (1989).
Second Amendment: The Right to Possess Guns Emphasize: That in 2008 the U.S. Supreme Court addressed the meaning of the Second Amendment as it applies to the maintenance of a militia versus an individual‘s right to possess and use guns in their homes. The case of District of Columbia v. Heller (554 U.S. 570 (2008)), in which the Supreme Court upheld the right of individuals to have handguns in their homes. See Sidebar 6.12 discussing the Heller case. Additional Matters for Discussion: Explain that striking down the District of Columbia‘s ban on possession of handguns does not necessarily mean other restrictions on the possession of guns are unconstitutional. Use current examples (perhaps from the students‘ local newspaper) concerning gun controls and the controversy around them. The Fifth Amendment: Takings Clause Emphasize: That the takings clause recognizes the existence and importance of private ownership, but allows the government to ―condemn‖ and take specific private resources for money under the power called eminent domain. Eminent Domain and the Common Good Emphasize: 1-95
The takings clause of the Fifth Amendment to the Constitution allows the government to take specific resources (usually but not always land) away from private owners for ―public use‖ upon the payment of ―just compensation.‖
Public Use Emphasize: That over the years public use has come to mean public purpose. That a number of states have passed laws preventing the units of government (cities and counties) from taking private land for private development purposes. Just Compensation Emphasize: That the government can only take what belongs to private owners upon payment of ―just compensation.‖ That when the state decides to take an owner‘s resources, it is determining that the right of property in these resources no longer serves the common good and that the greater common good requires that the resources be taken. Case 6.3: Kelo v. City of New London, Connecticut, 125 S.Ct. 2655 (2005) The Fourteenth Amendment: Equal Protection and Due Process of Law Emphasize: That two of this amendment‘s provisions are of very special importance to businesspeople—the due process clause and the equal protection clause. That the Fourteenth Amendment restricts actions by state and local governments. B. Due Process of Law Emphasize: The definition of due process as fundamental fairness and decency. That procedural due process cases involve whether proper notice has been given and a proper hearing has been conducted. Cases for Discussion: 1.
BMW of North America, Inc. v. Gore, 116 S.Ct. 1589 (1996).
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Dr. Ira Gore purchased in Birmingham, Alabama, a new BMW automobile for $40,750.88. After nine months, Dr. Gore noticed that the paint was flawed. He was told by the proprietor of ―Slick Finish‖ that his car had been repainted. Upon inquiring at the BMW dealership where he purchased the car, Dr. Gore was told that his car had been repainted prior to its sale. BMW acknowledged that it had a nationwide policy that if the cost of repairing damages done during manufacturing or transportation did not exceed 3% of the retail value, the car was sold as new. If such repairs exceeded the 3% figure, the car was used by the company for a period of time and then sold as a used vehicle. The actual cost of repairs to Dr. Gore‘s car was $601.37. Since this was well below the 3% stated in BMW‘s policy, the car was sold as new, and Dr. Gore was not informed of the repairs. Feeling that he had been defrauded, Dr. Gore filed a lawsuit against BMW. A jury awarded Dr. Gore $4,000 in compensatory damages and $4 million in punitive damages. BMW appealed the award of punitive damages and argued that this amount was constitutionally excessive. The Alabama Supreme Court reduced the punitive damages by half but upheld an award of $2,000,000. Issue: Is this award of punitive damages unconstitutional? Held: Yes, this award violates the due process clause. There are three standards that apply to ensure that a defendant is properly notified of the magnitude of a possible sanction. These standards include (a) a reasonable relationship between the potential punitive damages and the degree of reprehensibility of the defendant‘s action; (b) an appropriate ratio between the punitive damages and the actual harm caused by the defendant; and (c) a reasonable comparison among the punitive damages awarded and comparable sanctions in similar cases. Under these standards, the Alabama courts‘ award is unconstitutionally excessive. 2.
Connecticut v. Doehr, 111 S.Ct. 2105 (1991). A Connecticut law allows a court to put a prejudgment lien on an individual‘s home without notice or a hearing. Issue: Does the law violate the guarantee of due process? Held: Yes. Due process requires notice and a hearing before a lien is attached to a home or that there be emergency circumstances that make it impractical to hold a hearing first.
3.
Tulsa Professional Collection Services v. Pope, 108 S.Ct. 1340 (1988) An Oklahoma law required contract creditors of deceased persons to file claims within 2 1-97
months of the publication of a notice advising creditors of probate proceedings. Issue: Is this State action a denial of due process? Held: Yes. Creditors who are either known to the estate or whose identities are reasonably ascertainable are entitled by the Due Process Clause to receive notice by mail or other means certain to assure actual notice. The claim is a property interest and the probate procedures are state action. Incorporation Doctrine Emphasize: How the incorporation doctrine made the protections of the Bill of Rights applicable to individuals subject to state and local regulations. C. Equal Protection Emphasize: That not every classification or discrimination is a violation. The law requires invidious discrimination. The three tests by contrasting the strict judicial scrutiny test with the minimum rationality test and the quasi-strict scrutiny test. Sidebar 6.13—― Same-Sex Marriage and the Constitution‖ Sidebar 6.14—―Analysis of Equal Protection‖ Cases for Discussion: 1.
Fitzgerald v. Racing Association of Central Iowa, 123 S.Ct. 2156 (2003). The State of Iowa passed a law allowing slot machines to be placed on riverboats. The proceeds from these machines were taxed at the rate of 20%. Subsequently, Iowa permitted slot machines to be placed at racetracks. The proceeds from these machines were taxed at a rate as high as 36%. The racetracks owners filed suit arguing that the higher tax rate on their slot machines denied them the equal protection of laws. Issue: Does the existence of two tax rates on similar slot machines violate the Equal Protection Clause of the Fourteenth Amendment? Held: No. The Supreme Court holds that Iowa is regulating economic activities in this case. Therefore, the test of equal protection is based on minimal scrutiny. Since a 1-98
rational basis can be found (such as not wanting to encourage as many slot machines at race tracks as on riverboats), the two tax rates are upheld. 2.
FCC v. Beach Communications, Inc., 113 S.Ct. 2096 (1993). The Cable Communications Policy Act requires that cable operators be franchised by local governments. This Act exempts ―a facility that serves only subscribers in 1 or more multiple unit dwellings under common ownership, control, or management, unless such facility or facilities use any public right-of-way.‖ Issue: Does the exemption in this Act violate the equal protection clause? Held: No. There is a rational basis for the distinction provided. And since this is an economic regulation, the rational basis is applicable.
Minimum Rationality Emphasize: That under the minimum rationality approach, a law creating different classifications will survive an equal protection challenge if it has a rational connection to a permissible state end. Strict Scrutiny Emphasize: That under the strict scrutiny test, a classification will be a denial of equal protection unless the classification is necessary to achieve a compelling state purpose. That the strict scrutiny test is used if the classification involves either a suspect class or a fundamental constitutional right. Quasi-Strict Scrutiny Emphasize: When quasi-strict scrutiny approaches are used. That one reason gender has not been moved to the strict scrutiny analysis is cases involving gender discrimination are so infrequent; states understand that unequal protection on the basis of gender is unacceptable.
Answers to Review Questions and Problems 1-99
Basic Concepts 1.
Separation of Powers a. b.
2.
The horizontal aspect of separation of powers provides the checks and balances among the three branches of the federal government. The vertical aspect of this constitutional concept assists in defining the roles among various levels of government.
Supremacy Clause Yes. Since there is a conflict between the federal and Florida laws, the court must decide if the conflict can be reconciled. The U.S. Supreme Court found this conflict is irreconcilable; therefore, the federal law preempts the Florida law under the Supremacy Clause. Barnett Bank of Marion County, N.A. v. Nelson, 116 S.Ct. 1103 (1996).
3.
Commerce Clause a.
b.
4.
The commerce clause requires analysis in the following four areas—regulation of foreign commerce, regulation of interstate commerce, impact on interstate commerce, and possible limitations on federal regulatory authority. Students‘ answers will vary. One issue that could be discussed is the question concerning the scope and limit of federal authority under the Commerce Clause that comes from the Patient Protection and Affordable Care Act of 2010.
Contract Clause a. b.
This clause just addresses state government actions that may impair the obligation of contracts. This clause applies only to present contractual obligations. States are free to regulate future contracts.
Amendments and Basic Protections 5.
Freedom of Religion The Establishment Clause assures that no government will attempt to create a sponsored religion or church. The Free Exercise Clause protects each individual‘s choice to practice any particular religious faith. 1-100
6.
Freedom of Speech Silvia has the constitutionally protected right to use truthful information in promoting her professional accomplishments and abilities. Ibanez v. Florida Department of Business and Professional Regulation, Board of Accountancy, 114 S.Ct. 2084 (1994).
7.
Freedom of the Press a.
b.
8.
Yes, the law protects artistic expression, such as a play, from repression prior to its performance. There always is the possibility that a performance may not include the objectionable material or activity. Public persons are given less protection than enjoyed by private persons. Those in the former group must prove that a false statement about him or her was made with malice or an obvious disregard for the truth. A private person needs to establish only the falsehood.
Right to Possess Guns Individuals have the right to have guns, including handguns, in their homes for the purpose of self-defense. The introductory clause of the Second Amendment provides an example of, not a restriction to, the possession of guns by individuals.
9.
Due Process of Law The Incorporation Doctrine has been used by judges and justices to make the personal protections from the federal government‘s actions, as found in the Bill of Rights, applicable to state and local governments as well. This incorporation process has been accomplished through the use of the 14th Amendment‘s due process clause.
10. Equal Protection The three levels of judicial analysis under this clause are (a) rational basis, (b) quasi-strict scrutiny, and (c) strict scrutiny. For a complete listing of the types of cases under each category, refer to sidebar 6.14 labeled ―Analysis of Equal Protection.‖
Business Discussion #1 1.
Should you contest their claim?
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No. The freedom of religion cases have established that such employees are entitled to unemployment compensation. This is a free exercise case. 2.
What would be the result if the employees refuse to work on Sunday because of their desire to play golf on that day? No, the employee would not be entitled to compensation. The desire to play golf is not constitutionally protected—at least not yet.
Business Discussion #2 1.
Could the mayor prohibit the work from appearing in the show? It is highly unlikely that the mayor could prohibit the work from being displayed.
2.
Why or why not? Explain your answer using the appropriate legal standard. Whether the work in question is obscene must be determined by applying contemporary community standards. This work does not depict offensive sexual conduct nor does it appeal to prurient interests. The question regarding whether it lacks serious artistic value is an issue for the citizens of New York and for the art community to decide. From a religious perspective, while the work may be highly offensive to many, First Amendment Freedom of Religion does not apply. Note: This fact situation did occur and the work was exhibited. See Sidebar 6.6 regarding art and obscenity.
Chapter 7 The Property System Learning Objectives The objective of this chapter is to instill an appreciation for the institution of property and its role in encouraging the maximum production of what people want and need. It reaffirms the assertion in Chapter 1 that property—the state‘s recognition of a private individual‘s right to exclude others from legitimately acquired resources—is fundamental to the modern private market and is conceptually intertwined with the idea of liberty. The chapter describes the basic divisions of property, the topics of bailment, security interests, and nuisance. 1-102
References
Bernhardt, Roger, et. al, Real Property in a Nutshell, 7th ed. West (2005). Burke, Barlow, Personal Property in a Nutshell, 6th ed. West (2003). De Soto, Hernando, The Mystery of Capital. (2000). Elias, Stephen, Patent, Copyright & Trademark, 3d ed. Nolo.com (1999). Epstein, Richard A., Takings. Harvard (1985). Hardy, Trotter, Project Looking Forward: Sketching the Future of Copyright in a Networked World. U.S. Copyright Office (1998). Johnston, David, et al, Cyber Law. Stoddart (1997). Merrill, Thomas W., ―Property and the Right to Exclude,‖ 77 Neb.L.Rev. 730 (1998). Singer, Joseph William, Property Law: Rules, Policies, and Practices Aspen Pub. (2006).
Teaching Outline I. Introduction to the Property-Based Legal System (LO 7-1) Emphasize: The definition of property. Some additional definitions of property. Sidebar 7.1 discussing property as a foundation of the private market. II. Rationale for the Property System Emphasize: That as long as people need or want more resources than they have available to them, society will order how people relate to each other in acquiring and possessing these resources. A. The Problem of Limited Resources Emphasize: That in Western political theory, the state comes into being in response to the problem of limited resources. That there are two basic legal frameworks and the state responds to the problem through state planning at one end and private property (property) at the other. That for the property system to function most effectively in promoting prosperity, it should be applied according to the rule of law, which means it should be applied generally and equally to everyone. 1-103
Sidebar 7.2—―The Three Faces of Property‖
Additional Matters for Discussion: Property is often taught as a ―bundle of rights,‖ such as the rights to possess, use, and transfer (exchange) resources. But, property can also be envisioned primarily as a negative blanket right, the right to exclude others, including the state. As Professor Merrill wrote (see References), ―Give someone the right to exclude others from valued resources… and you give them property. Deny someone the exclusion right and they do not have property.‖ Point out that the term ―property‖ comes from the Latin proprius, referring to that which is appropriate or proper to one. In an abstract sense, property is a legal sphere within which one can freely make choices about, use, and produce resources. B. Property and Prosperity Emphasize: That property creates some of the maximum conditions known for producing and sustaining prosperity. That private property establishes maximum conditions for wealth creation through promoting incentive. How property helps establish the conditions necessary for capital formation, which refers to that quality of resources that produces new or different resources, e.g., turning a business idea of physical assets into money through incorporation or a mortgage loan. That property divisibility relates to capital formation and refers to how property permits resources to be broken into parts and used in many ways while the owner still retains a property interest in each part.
Additional Matters for Discussion: Since the institution of property promotes individual prosperity and permits unequal accumulation of resources, it is easy to see why some students may associate property with greed and materialism. Students may not appreciate that the resources that property protects are usually limited only at a point in time, not over time, and that the function of the private market is to generate new resources, new wealth. Point out the poverty of Russia and North Korea as examples of what happens to incentive in the absence of property. Tom Bethell‘s The Noblest Triumph (1999) is an excellent book to recommend to students on the importance of property. Discuss Sidebar 7.3, regarding the mystery of capital. Observe that property need not be viewed as a normative good in order for it to be 1-104
appreciated as a condition for maximum production of resources and as a necessary foundation of the modern private market. III. Defining Property in the Legal System (LO 7-2) A. Two Basic Divisions of Property Emphasize: The difference between real and personal property. That all property that is not realty is personality and that the possible range of types of resources in which an owner can have personality is infinite. How tangible personal property can become a fixture. What intangible personal property is. Figure 7.1 on divisions of property. B. Property Boundaries in the Physical World Emphasize: That land is not fully contained when owned or transported when sold; law rather than intuition must provide the physical boundaries. Sidebar 7.4—― Additional Complexity in Defining Intangible Property‖ Defining Land Emphasize: That it is important to understand that land ownership consists of more than the surface of the property. Air Rights Emphasize: That the owner of real property also possesses the air above the land to the extent that the owner can occupy or use it in connection with the land. Sidebar 7.5 ―Trespassing Drones?‖ Subsurface Rights Emphasize: That a landowner also owns the rocks and minerals beneath the land. That subsurface rights have additional complications in that many belowground 1-105
substances are not static. Case 7.1: Briggs v. Southwestern Energy Production Co., 224 A.3d 334 (PA 2020).
Fixtures on Land Emphasize: What a fixture is. IV. Interests in Property with Respect to Others and Time (LO 7-3) A. Types of Ownership Emphasize: That the law allows division of resource ownership into various types, or degrees. The resource divisions suggested by fee simple, life estate, leasehold estate, and concurrent ownership. V. Specialty Applications of Property Emphasize: That the private legal fence of property allows an owner to exclude others from interfering with (1) the possession of an object or resource, (2) the transfer of the object or interest by gift or through exchange with other owners, and (3) all uses of the object that do not harm other owners in what belongs to them. A. Easements Emphasize: That an easement places a particular use of land behind the exclusive legal fence, which usually involves the right of passage across the land. Easement by reservation, natural easement, negative easement, and easement by prescription. Case 7.2 Duke Energy Carolinas v. Gray, 789 S.E.2d 445 (N.C. 2016) B. Bailments Emphasize: That an owner puts an object protected by personal property into the intentional possession of another person with the understanding that the other person must return the object at some point or otherwise dispose of it. 1-106
The three categories that bailments fall into. Sidebar 7.6 ―Is Your Financial Data ―Property‖ That Is Bailed?‖
VI. Acquiring Resources in a Property System (LO 7-4) A. Acquiring Resources through Exchange Emphasize: The most common way of acquiring resources is through exchange. The private market is based on exchange. The rules under which people voluntarily exchange resources in a property system are called the rules of contract. (Reference Chapter 8.) That a nation‘s capacity to observe legally enforceable contracts is considered the single most significant indicator that the nation‘s economy is ready for international trade. B. Acquiring Resources through Possession Emphasize: That the rule of first possession is that the first person to reduce previously unowned things to possession becomes their owner. Additional Matters for Discussion: Note that Hernando de Soto (see References) points out the importance of possession in the formation of the U.S. property system. The importance of the Homestead Act aside, de Soto asserts that much land in the New World that had been granted to favorites by the British king was in fact possessed by squatters who eventually were granted formal ownership—or property—in their possession. Have the class discuss Sidebar 7.7 regarding the Barry Bonds‘ home-run ball. Lost Items Emphasize: The marginalia and how it applies to lost property. The difference between lost and mislaid property and the rights and responsibilities of the finder of each. Adverse Possession Emphasize: The concept of adverse possession. 1-107
How the famous Homestead Act of 1862 illustrates how ownership can be acquired through adverse possession. Sidebar 7.8—―Curing Blight through Adverse Possession?‖
C. Acquiring Resources through Confusion Emphasize: The meaning of fungible. The doctrine of confusion. The importance of boundaries to the concept of property. D. Acquiring Resources through Accession Emphasize: That accession refers to something ―added.‖ The implication of wrongful accession. That much of the property foundation of the modern private market depends on the right to exclude others legally from what one owns and what one adds to that. E. Acquiring Resources through Gift Emphasize: The terms donor and donee. That to transfer ownership by gift, a donor must both intend to make the gift and deliver the gift by physical transfer to the donee. What testamentary gifts are. F. Title and Property Registration Emphasize: That ownership is frequently referred to by the term title. That someone who owns something has title to it. When an owner transfers ownership, the owner is said to ―pass title.‖ That a deed is the document of title that transfers ownership of land. The different kinds of deeds and why and when should each type be used. VII. Property and Security Interests (LO 7-5) Emphasize: That the two principal types of security interests are mortgages and secured transactions 1-108
under Article 9 of the Uniform Commercial Code. A. Security Interests in Land Emphasize: The similarities and differences among mortgages, land sales contracts, and deeds of trust. Recording Statutes Emphasize: The importance of registration (recording) of the security interests. The legal perils of the mortgagee failing to record the mortgage. Foreclosure, Deficiency, and Redemption Emphasize: The meaning of foreclosure, deficiency, and right of redemption. B. Secured Transactions Emphasize: The meaning of collateral. How attachment takes place. Perfection
Perfection gives a creditor a secured interest in the collateral. The meaning of financing statements and purchase money security interest.
C. Artisan’s Liens and Mechanic’s Liens Emphasize: How artisan‘s and mechanic‘s liens arise and their priority significance as security interests. VIII. Limitations on Property and the Common Good (LO 7-6) A. Property, the Use of Resources, and the Equal Rights of Others
1-109
Emphasize: That in law, property is not a thing. It is an owner‘s right to exclude others from resources. The use of things by owners is limited by the equal right of others, i.e., owners are prohibited from using their resources in ways that harm or injure the resources of other owners. B. Nuisance and Zoning Emphasize: That a public nuisance arises from some use of land that causes inconvenience or damage to the public. That a private nuisance is any unreasonable use of what belongs to one, usually land, so as to cause substantial interference with the enjoyment or use of another‘s land. Courts issue a variety of remedies for nuisance-creating activity. That zoning ordinances are publicly established limitations on an owner‘s use of resources that protect health, safety, morals, and general welfare. Sidebar 7.9—―Light, Odor, Noise, and the Property Fence‖ Case 7.3: Cook v. Sullivan, 829 A.2d 1059 (N.H. Sup. Ct. 2003). C. Property Limitations and the Common Good Emphasize: The variety of limitations on property illustrate that the purpose of property is to promote the common good. Duration Limitations on Property Emphasize: The rule against perpetuities limits all exercise of property over resources to a duration of ―lives in being plus twenty-one years.‖ The rule against perpetuities prevents an owner from controlling resources through many future generations by setting up trust arrangements, under which trustees are legally required to carry out the wishes of the owner for extended duration. Taxation Emphasize: That federal taxation is a specified power of Congress, contained in Article 1, Section 8 of the Constitution. 1-110
That taxation is a limitation on property and is used to promote the general welfare (common good). The controversial nature of progressive income taxation and that the top 1% of federal income tax payers pay more dollars tax than the bottom 60% do, according to the Congressional Budget Office. Whether or not the benefits of individuals having the property system justify unequal taxation when some individuals end up with much greater resources than others.
D. Property: A Conclusion and Comment Emphasize: How property law founds the private marketplace in the modern nation by establishing an essential framework for the voluntary and certain exchange of identifiable resources. That business students need to appreciate the fundamental role of law in business even if they oppose specific rules or regulations. James Madison‘s concern about an excessively unequal distribution of resources.
Answers to Review Questions and Problems The Property System 1.
The Problem of Limited Resources The former Soviet Union expected and when necessary it required citizens to contribute the fruits of their efforts to society and to share accordingly. People contributed and benefitted at different levels, so incentive to excel was not a factor.
2.
Property and Prosperity a. b.
Property provides greater incentive to develop resources. When resources are visible and attainable, the incentive to work toward obtaining resources allows for the nation to benefit from their accumulation through trade and taxes.
Defining Property in the Legal System 3.
Two Basic Divisions of Property a.
Real property is land and the interests in land. Personal property is essentially anything 1-111
b.
other than real property. A chandelier is a piece of personal property that has become attached to the real property and as a fixture, it becomes part of the real property. One must look to the sales contract to determine whether it is permissible for Martin to remove the fixture.
Property Boundaries in the Physical World 4.
Defining Land a.
b.
c. d.
Students‘ answers will vary. With the advent of aircraft as well as subsurface drilling for minerals, oil, gas, and water, it has become necessary to place reasonable limits on a landowner‘s rights. Yes, it has infringed on her property. The owner of real property also possesses the air above the land to the extent that the owner can occupy or use it in connection with the land. Students‘ answers will vary. The strict rule of capture may be limited by additional rules that preserve the rights of adjoining owners. Students‘ answers will vary.
Interests in Property with Respect to Others and Time 5.
Types of Ownership a.
b.
c. 6.
Easements a. b.
7.
The fee simple defeasible has a condition attached to its conveyance. If the condition is met, the usual result is that the land returns to the original conveyor or is transferred further according to the wishes of the original conveyor. Upon one‘s death the land reverts to the original grantor who is said to keep a reversion interest in the land. If the land goes to someone other than the grantor upon one‘s death, that person has a remainder interest. If either Arla or Jack dies, the surviving party becomes the sole owner of the house.
An easement is a property fence because it protects easement owners from the world‘s interference with their right of use. An easement by prescription arises when an owner of land fails to interfere with a trespasser‘s adverse use of land for a statutory period of time.
Bailments
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a.
b.
c.
The lease of a mowing tractor is a bailment because it fits the definition of someone taking possession of an owner‘s tangible, movable resource with the obligation to return or dispose of it at the instruction of the owner. A warehouseman is liable in this situation because the equipment has been used in a way not specified by the bailment. If the equipment had been destroyed in warehouse 314, the warehouse might not have been liable if it was using reasonable care, the duty owed by mutual benefit bailee. To prevent this kind of problem, the parties to a bailment often insure the goods. Common carriers are usually strictly liable except in limited circumstances for goods that are destroyed in the possession of the common carrier. It is important to note that common carriers often contract away much of their liability.
Acquiring Resources in a Property System 8.
Acquiring Resources through Exchange a. b.
9.
The law of contract is essential to the transfer of property between parties. Contract law helps provide certainty in resource exchanges.
Acquiring Resources through Possession a.
b.
The finder of lost property becomes the owner of the property after a statutory period in which the true owner must be sought. If Lee has advertised the finding of the ring in an appropriate manner and the statutory period has run, Lee keeps the ring. If the statutory period has not expired or if Lee has not sought the original owner, the original owner will have the ring returned. If the building has existed for the state statutory period and all adverse possession requirements have been met, the six inches will be owned by Downtown. If the statutory period is not yet run, there may be a suit to have Downtown Condos torn down. Most likely, Downtown may perhaps purchase the six inches of land or the two owners will be urged to come to some sort of easement or licensing agreement.
10. Acquiring Resources through Confusion a.
b.
Fungible goods are goods sold by weight or measure that when combined with identical goods cannot be identified and separated. Examples will vary. Gasoline from two sources mixed into one holding tank is one example. Property is all about the legal right to exclude others from what is ―proper‖ to a person and another person. Without adequate boundaries to a resource, it would be impossible to identify what is ―mine‖ versus what is ―yours.‖ 1-113
11. Acquiring Resources through Accession a.
b.
Accession occurs when value is added to personal property. If the original property was improperly taken, in most cases the original owner retains ownership including the improvements. If the original property was not improperly taken, the property may be forfeited with the original owner compensated for his or her loss. Locke believed that people should own their work efforts and if the fruit of their efforts results in something not previously owned becoming something new, then those who labored should own that new thing.
12. Acquiring Resources through Gift a.
b.
Typically delivery must include that the gift be intended and actually physically transferred to the other party. Constructive delivery includes intention but physically handing the gift over does not occur. The party is either told to retrieve it themselves or something representing the delivery is transferred. A testamentary gift is a gift made through will. The gift takes place upon the death of the testator.
13. Title and Property Registration a.
b.
The warranty deed guarantees to the grantee that the grantor owns the property and has full power to convey the property. A special warranty deed specifies that some claims to the property exist but guarantees against other unnamed claims. The quitclaim deed makes no guarantees but says that the grantor transfers any rights he or she has to the property to the grantee. Recording or registration of the deed evidences ownership and title, putting one‘s rights on public notice.
Property and Security Interests 14. Security Interests in Land a. b.
The three types of security interests in land are deeds of trust, mortgages, and land sales contracts. Recording mortgages and deeds of trust are important because creditors holding such security interests will not be able to enforce them against a subsequent buyer of the land if these security interests have not been properly recorded. With a land sales contract, however, the title and thus the recording of it remains with the creditor 1-114
granting the security interest until the buyer has paid off the debt. 15. Secured Transactions a. b. c. d.
The secured party must give value, the debtor must own the collateral, and a security agreement must be given for attachment of a security interest under UCC, Article 9. Perfection of a security interest may be accomplished by filing a financing statement or through a purchase money security interest. Not if Zan is considered to be a buyer in the ordinary course of business. These buyers would get priority over a perfected security interest. Yes. If there are two unperfected security interests, the first in time has priority.
16. Artisan’s Liens and Mechanic’s Liens Because this is an improvement on real property, a mechanic‘s lien would be applicable. It would attach to the house and would follow any sale or could lead to foreclosure and forced sale to pay the lien. Limitations on Property and the Common Good 17. Property, the Use of Resources, and the Equal Right of Others It is important to have a property right in the uses of things because if one can only possess but not use an object, it has little value. 18. Nuisance and Zoning a.
b.
A public nuisance causes inconvenience or damage to the public. A private nuisance unreasonably interferes with another property owner‘s use and enjoyment of his or her land. Nuisance law basically says that one‘s legal uses, and thus the boundary of the property fence, do not extend to harming the public interest or to ―unreasonably‖ crossing the proper fences of one‘s neighbors. Saying that one can only use something in a ―reasonable‖ way is similar to saying one cannot use it in ways that harm the common good. Students‘ answers will vary.
19. Property Limitations and the Common Good The rule against perpetuities limits the rights over property after an owner‘s death. This in turn prevents the deceased from controlling or tying up resources. As society changes and 1-115
technology develops, society could be hurt if property is tied up indefinitely with no one to respond to the changes. The rule indicates that the need for resource use may change in ways that the dead hand should not control. This position ensures that new possible uses for land and other resources serve the common good. 20. Taxation At the federal level it is legal because it is authorized by the Constitution. At the state level it is considered to be one of the general powers of governments. 21. Property: A Conclusion and Comment a.
b.
Madison thinks that the private property system can lead to unequal possession of resources and jealousy, which in a democracy may lead to confiscatory taxation that may kill the incentive that leads to the productive wealth justifying the system in the first instance. The original statement infers actual parcels of land and items of personal property. In other words, it refers to things that are owned. The second statement refers to the rights to ownership and the right to exclude others from one‘s resources and possessions.
Business Discussion #1 1.
What do you say to this person in light of what you have read in this chapter? Essentially, one could say that socialism will not be as productive as a private property system. With little to no incentive to own property, progress is stifled.
2.
What strategy might you suggest regarding getting more private land into the hands of the poor in that country? Taxation, purchase, and redistribution to the poor might be effective. Remember homesteading was a way of getting the land into the hands of the poor in the United States.
Business Discussion #2 1.
What does he mean by this statement? Discuss. Richard Epstein means that the use limitations of the property are based on reasonableness—meaning a thoughtful, measured, and public consensus about resource use. 1-116
2.
Explain what it means to say that property is the central concept in our legal system. It means that almost all of the U.S. laws can be expressed in terms of legal fences. Contract law, tort law, most criminal laws, constitutional rights, and many statutory regulations of uses can be explained through the concept of property boundaries.
Chapter 8 Contract Formation Learning Objectives
The purpose of this chapter and the next is to introduce students to that body of law known as contracts, which underlies the buying and selling agreements of the private enterprise system. The chapter emphasizes a broad, overall coverage of contract law. Special attention is devoted to the vocabulary and concepts of classification and formation of contracts. Recognizing when particular forms of contracts are required is also discussed. These topics permit students to comprehend how many of the other subjects discussed in this book are based, at some level, on contract law.
References
Benson, P., The Theory of Contract Law: New Essays. Cambridge University Press (2001). Calamari, J. and J. Perillo, Calamari and Perillo‘s Hornbook on Contracts. Thomson West (2003). Epstein, R.A., Contract: Freedom and Restraint. Garland Publishers, 2000. Gilmore, Grant, The Death of Contract. Ohio State University Press (1995). Gordley, J., Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment. Oxford University Press (2006). Matthew, H., Contract Law and Morality. Greenwood Press (1999). Slawson, W.D., Binding Promises: The Last 20th Century Reformation of Contract Law. Princeton University Press, 1996. Treitel, G.H., Some Landmarks of Twentieth Century Contract Law. Clarendon (2002).
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Teaching Outline
I. Basic Concepts A. Contract Law in Private Enterprise (LO 8-1) Emphasize: That contract law enables people to make agreements legally enforceable. Why contract law is more important to a private enterprise economy than it is to a statecontrolled economy.
B. Sources of Contract Law Emphasize: What it means to say that most contract law is common law. That perhaps the most important example of state-based legislation impacting contract law is the Uniform Commercial Code (UCC). Article 2 of the UCC covers the sale of goods. Selected differences between UCC and common law contracts are in Table 1.
II. Contractual Classifications and Terminology (LO 8-2) A. Bilateral and Unilateral Contracts Emphasize: The different ways of classifying contracts. Point out that these classifications do not refer to different types of contracts but merely to different ways of talking about them. That while bilateral contracts involve an exchange of a promise for a promise, a unilateral contract is an agreement with only one promise, and only one party is committed to perform. Additional Matter for Discussion: Figure 8.1 describes a bilateral contract. Figure 8.2 describes a unilateral contract. B. Express and Implied-in-Fact Contracts 1-118
Emphasize: That the distinction between express contracts and implied-in-fact contracts illustrates how everyone makes contracts all the time. In most business contracts, conflicts and disputes can be avoided if the parties take time to express clearly the terms of the agreement. Case 8.1 Leyden v. American Accreditation Healthcare Commission, 83 F.Supp.3d 241 (D.D.C. 2015), which shows the requirements for an implied-in-fact contract. Additional Matter for Discussion: Sidebar 8.1 on implied contracts being created by unsolicited idea submission. Case for Discussion: 1.
Razdan v. General Motors Corporation, 2000 U.S. App. LEXIS 21446 (7th Cir. 2000). Hari Razdan goes to work as an hourly employee in anticipation of being hired full-time at a salary of $72,800 with benefits. After working for $35 per hour for 6 months, Razdan is offered a full-time position at $63,600 with full benefits. He refused this offer but continued to work on an hourly basis until he was terminated 2 years later. Razdan sues G.M. claiming there was an implied-in-fact contract for full-time employment at $72,800 per year and that G.M. breached this contract. Issue: Did an implied-in-fact contract exist for Razdan‘s full-time employment? Held: No. The court analyzed Razdan‘s various factual claims and found none justified the existence of an implied-in-fact contract. There is no offer from G.M. to hire Razdan on a full-time basis for $72,800. Without an offer, there can be no binding contract.
C. Implied-in-Law or Quasi-Contracts Emphasize: That when one party is unjustly enriched at the expense of another, the law may imply a duty on the first party to pay the second even though there is no contract between the two parties. That the doctrine that requires this result is based on an implied-in-law contract. Since there really is no actual contractual agreement, the phrase quasi-contract is also used. Sidebar 8.2 ―Implied Warranties‖ D. Contractual Enforcement Terminology 1-119
Emphasize: The following terms: o Enforceable contract o Unenforceable contract o Valid contract o Void contract o Voidable contract The in pari delicto rule and how a party‘s action can change a voidable contract into either a valid or a void contract. Additional Matter for Discussion: How the study of the essential elements of contracts (sections 8–12 of the text) links to the terminology presented in this section. E. Contractual Performance Terminology Emphasize: The following terms: o Executed contracts o Executory contracts How these terms relate to other terms, such as bilateral and unilateral contracts. Additional Matter for Discussion How the study of the performance of valid, enforceable contracts (chapter 9) is linked to the terms presented in this section. III. Contract Formation (LO 8-3) A. Offer to Contract Emphasize: The term ―offer‖ and explain the terms ―offeror‖ and ―offeree.‖ Definite Terms Emphasize: The doctrine of indefiniteness. Note that most advertisements, catalog, and web page price quotes are considered too indefinite to form the basis for a contract unless they are specific about the quantity of goods being offered, as well as the intended offeree. 1-120
That under the UCC, contracts for the sale of goods can leave open nonquantity terms to be decided at a future time (§2-305). Note that this rule applies only to sales of goods. See Sidebar 8.3 on intent to make a valid offer. See Sidebar 8.4, which examines whether an online policy is a definite offer.
Cases for Discussion: 1.
Newman v. Schiff, 778 F.2d 460 (8th Cir. 1985). The defendant made an offer on CBS News Nightwatch that he would give $100,000 to anyone who could cite any section of the Internal Revenue Code that says an individual is legally required to file a tax return. He said he would give the money to ―anyone who calls this show.‖ The plaintiff‘s attorney saw a news rebroadcast of the offer and phoned the defendant. Held: The news clip merely informed viewers that the defendant had made the offer, which had terminated at the show's end. Additional Matter for Discussion: Figure 3.1 on contract elements and defenses.
2.
Grove v. Charbonneau Buick-Pontiac, Inc., 240 N.W.2d 853 (1976). The defendant‘s car dealer offered to give a new car to anyone who hit a hole-in-one in the eighth hole of a local golf tournament. The local golf course had only nine holes, so each hole was played twice from a different tee. On the 17th tee (second time the plaintiff played hole number 8) he hit a hole-in-one. When the defendant refused to give the plaintiff a new car, claiming that the plaintiff had hit his hole-in-one on the 17th hole rather than on the 8th hole, the plaintiff sued. Held: Charbonneau‘s offer to give the new car as a prize was accepted by the making of the hole-in-one. The court ruled that there was ambiguity as to whether the defendant‘s offer applied to the 8th tee and 17th tee or only to the 8th tee. It thus construed the contract against the defendant and ordered the defendant to honor the contract or to give the plaintiff damages.
3.
O’Keefe v. Lee Calan Imports, Inc., 262 N.E.2d 758 (1970). Plaintiff saw an automobile advertised in the Chicago Sun-Times for $1,095. When the plaintiff went to the defendant‘s place of business and attempted to buy the car for that 1-121
price, he was notified that the price was an error and that the defendant would not honor the advertised price. The plaintiff sued, arguing that the advertised price was an offer that he had accepted. Held: The error in the advertised price was the printer‘s fault rather than the advertiser‘s. In any event the advertisement was so vague and indefinite that it could not be regarded as a valid offer. Termination of Offer Emphasize: Termination due to the explicit acts of the parties. Automatic termination by operation of law.
B. Acceptance of Offer Emphasize: How unilateral and bilateral contracts are accepted. Mirror Image Rule Emphasize: That for an acceptance to create a binding contract, standard contract laws require that the acceptance must ―mirror‖ the offer, that is, must match it exactly. The marginalia about changing terms of offers in acceptance becoming a counteroffer. UCC Battle of the Forms Emphasize: How the UCC has changed the mirror image rule. Case 8.2 Gottlieb & Co., Inc. v. Alps South Corporation, 985 So. 2d 1 (Fla. App. 2007)—Finding terms were included in a contract even though it appeared only on plaintiff‘s forms and were not specifically discussed by the parties. Silence Not Acceptance Emphasize: How course of dealing and conduct can imply acceptance and thus provide exceptions to the rule that silence is not acceptance. 1-122
Mailbox Rule Emphasize: The deposited acceptance rule is also called the mailbox rule. Sidebar 8.5 highlights the relevance of the mailbox rule in modern business transactions. Additional Case for Discussion: 1.
Sharp Electronics Corporation v. Deutsche Financial Services Corporation, 216 F.3d 388 (4th Cir. 2000). Sharp Electronics sold merchandise to Montgomery Ward. Deutsche Financial loaned money to Montgomery Ward by paying Sharp for the merchandise shipped after approving the invoice faxed by Sharp. Essentially Deutsche Financial agreed to pay for the merchandise shipped by Sharp within 30 days following receipt of the faxed invoice. Montgomery Ward changed financial services manager and lender from Deutsche Financial to G.E. Capital. After being informed of this change by Montgomery Ward, Deutsche Financial informed Sharp that related to a May 23 invoice it was agreeing to finance, Deutsche Financial would pay only for merchandise shipped by Sharp on or prior to May 28. Sharp shipped $1.3 million worth of merchandise to Montgomery Ward on May 31. When Sharp was not paid for this merchandise, it sued Deutsche Financial claiming the agreement relative to the May 23 invoice covered thirty days. Issue: Is Deutsche Financial liable to Sharp for the $1.3 million worth of merchandise shipped after May 28? Held: No. Whether the contract between Deutsche Financial and Sharp was bilateral or unilateral in nature is critical to determine. The 4th Circuit Court of Appeals concludes that the relationship results in a unilateral contract—Sharp faxes an invoice which Deutsche Financial accepts by its financing. Since each transaction is of a unilateral nature, Deutsche Financial can and did state the limitation of its financial commitment. Thus, the May 23 invoice by the language of Deutsche Financial‘s limited acceptance (financing shipments on or before May 28) relieves Deutsche Financial of liability to pay for the merchandise shipped on May 31.
C. Consideration Emphasize: 1-123
What constitutes consideration in unilateral and bilateral contracts. What it means to say that consideration must be bargained for exchange. Case 8.3 Vassilkovska v. Woodfield Nissan, Inc., 830 N.E.2d 619 (Ill. App. 2005)— Showing that any legal benefit may be considered to be valid consideration, and that courts usually do not consider the value of the consideration. Agreement Not to Sue Emphasize: That when reasonable grounds for a lawsuit exist, an agreement not to sue is consideration to support a promise. Give the example of accord and satisfaction. Preexisting Obligation Emphasize: That a party to an agreement does not give consideration by promising to do something that he or she is already obligated to do. Sidebar 8.6 discusses how the UCC changes the legal requirement of consideration under the preexisting obligation rule. Past Consideration Emphasize: Past consideration is no consideration; performance made before the parties discuss their agreement does not count. Promise to Make a Gift Emphasize: The different situations when promises may be enforceable even though no consideration is present. Option Contracts Emphasize: In contracts that are not between merchants selling goods, a promise to keep an offer open for a certain time period must be supported by the offeree‘s consideration. Promissory Estoppel
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Emphasize: Arises when a promisee justifiably relies on a promisor‘s promise to his or her economic injury. Promissory estoppel may be used when the facts of a business relationship do not meet the requirements of an express or implied contract.
Cases for Discussion: 1.
Esquire Radio & Electronics, Inv. C. Montgomery Ward & Co., 804 F.2d 787 (2d.Cir. 1986). Esquire Radio & Electronics (Esquire) helped develop and import consumer electronics products for Montgomery Ward & Co. (Ward). Ward issued import orders to foreign manufacturers for products and spare parts. The orders were shipped to Esquire, which inventoried both products and spare parts for Ward‘s buy-back. Although this arrangement continued for many years, the buy-back terms were never expressly set forth. On several occasions, Esquire became concerned about its large inventories of spare parts. Each time Esquire was assured that Ward would buy the parts, and Ward urged Esquire to inventory even more. In 1984, Ward terminated its relationship with Esquire and refused to buy Esquire‘s existing spare-parts inventory. Esquire sued. Issue: Must Ward pay for the spare parts that Esquire has in inventory? Held: Yes. The doctrine of promissory estoppel applies to the facts of this case. Promissory estoppel has three principal requirements: ―a clear and unambiguous promise; a reasonable and foreseeable reliance by the party to whom the promise is made; and an injury sustained by the party … by reason of his reliance.‖ Based on the evidence, the jury properly concluded that, over the years, Ward induced Esquire to accumulate spare parts by promising that the parts would be repurchased. Esquire reasonably and foreseeably relied on such promises and was injured.
2.
Widmer v. Gibble Oil Co., 421 S.W.2d 886 (1967). When the plaintiff oil company attempted to collect the $67.80 balance on the defendant‘s credit card account, the defendant sent a check to the company for $9.01 and marked the check ―full payment of all accounts to date.‖ The plaintiff cashed the check. The defendant maintained that there had been an accord and satisfaction. Held: The credit card account was a liquidated debt, and acceptance of less than what is 1-125
owed for a liquidated debt cannot be an accord and satisfaction.
D. Capacity of Parties to Contract Emphasize: That the term capacity refers to a person‘s ability to be bound by a contract. That courts have traditionally held three classes of persons to lack capacity to be bound by contractual promises: minors, intoxicated persons, and mentally incompetent persons. Minors Emphasize: How a minor may disaffirm or ratify a contract. Intoxicated and Mentally Incompetent Persons Emphasize: That except when a court has judged an adult to be mentally incompetent, that adult does not lose capacity to contract simply because of intoxication or mental impairment. That a contract is voidable by the intoxicated or mentally impaired person. Cases for Discussion: 1.
Libby, McNeil & Libby v. United Steelworkers, 809 F.2d 1432 (9th Cir. 1987). Libby, McNeil & Libby (Libby) sought a judgment declaring that the collective bargaining agreement it had with the United Steelworkers did not obligate it to pay certain pension benefits. Libby contended that it had never agreed to pay the benefits, and if it had, it had done so by mistake. The magistrate found that Libby had agreed to include in its agreement whatever pension benefits American Can Co. provided in its plan, which included the contested ones. Held: A unilateral mistake will excuse Libby from the contract only if the Union knew of Libby‘s mistake. The magistrate found that the union did not know of Libby‘s mistaken belief.
2.
Discuss the implications of the experienced 13-year-old baseball card collector who 1-126
bought a Nolan Ryan rookie card from an inexperienced sales clerk for $12. The shop owner sought to rescind the sale on the basis that the card was a $1,200 card that had been mistakenly marked $12. Eventually, the parties agreed to auction the card for charity. It brought $5,000. 3.
Leenawee County Bd. of Health v. Messerly, 295 N.W.2d 903 (1980). Seller intended to sell and buyers intended to buy rental income property. In fact the property had no value either as income property or single-family residence due to its condemnation by the county health department as unfit for habitation. The buyer sued for rescission. Held: The Michigan Court of Appeals held that the purchase of the real estate as income-producing property was a basic element of the contract. Rescission on the ground of mutual mistake is appropriate.
E. Lawful Purpose Emphasize: What it means to say that illegal contracts are void. Sidebar 8.7 focuses on unconscionable contracts. There are several exceptions to the general rule that courts will take no action on an illegal contract. Contracts that Restrain Trade Emphasize: When contracts that restrain trade often are illegal and void. Mention that chapter 16 will discuss antitrust law and discusses these contracts and their illegality. How covenants not to compete are used and when they are enforceable. Sidebar 8.8 ―Restraining Competition in Sandwiches?‖ IV. When a “Meeting of the Minds” Is Lacking (LO 8-4) A. Fraud or Innocent Misrepresentation Emphasize: What constitutes fraud and misrepresentation and how they affect capacity to contract. Sidebar 8.9 ―How Green is my Ad?‖ which discusses deceptive advertising and the FTC.
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B. Mistake Emphasize: The difference between a unilateral mistake and a mutual mistake. C. Duress or Undue Influence Emphasize: What constitutes duress and undue influence and how they affect capacity to contract. Cases for Discussion: 1.
American Telephone and Telegraph Co. v. United States, 1997 U.S. App.Lexis 26291 (Fed.Cir.). AT&T agreed to develop an antisubmarine warfare system for the Navy for a fixed price of $34.5 million. When the system ended up costing AT&T a claimed $101 million, AT&T sued and asked the court to reform the contract or award it a sum for unjust enrichment. AT&T claimed that section § 8118 of the Department of Defense Appropriations Act prohibited fixed-price contracts in excess of $10 million unless certain procedures were followed. Since the procedures were not followed, the Navy had no authority to make the contract, and the contract was void as illegal. The trial court declared the contract illegal, but granted AT&T unjust enrichment. Issue: Was the contract void as illegal? Should unjust enrichment have been granted? Held: Yes and No. The attempt by the Navy to obligate funds for a contract not properly authorized by Congress is ineffective and void. The court cannot reform a contract that, like this one, is void from its inception. The court cannot salvage an otherwise void contract by declaring it an implied-in-fact contract and granting unjust enrichment. The court suggested that AT&T could recover its goods from the Navy or sue for their wrongful retention and use.
2.
Lindemann v. Eli Lilly & Co., 816 F.2d 199 (5th Cir. 1987). Plaintiff farmers sued defendant manufacturer because purchased chemicals failed to control weeds. Defendant raised a damage limitation clause from the purchase contract. Held: The limitation clause is legal as the plaintiffs were experienced, sophisticated chemical users. 1-128
3.
McCutheon v. United Homes Corp., 486 P.2d 1093 (1971). The plaintiff fell down a poorly lit flight of stairs leading from her apartment, and when she sued the defendant lessor for negligence, the defendant raised the defense that the plaintiff lessee had signed a contract agreeing to give up her rights to sue the defendant for injury that occurred on the premises. Held: The exculpatory clause was illegal as against public policy. The court noted that these exculpatory clauses were not isolated agreements but were generally used upon ―thousands of potential tenants.‖
V. Contract Form LO (8-5) A. Oral Contracts Emphasize: That oral contracts generally are as enforceable as written ones. That in certain situations, the law requires contracts to be in a written, signed format. Additional Matters to Consider: Discuss common situations when students make a contract—in retail stores, in restaurants, or when they are in conversation with friends and family. What kind of language is typically used in these situations? Point out that we seldom use formal language of contractual promises or obligations. B. Statute of Frauds Emphasize: The law requiring that certain contracts be in writing is known as the statute of frauds. The statute of frauds requires certain types of business-related contracts to be in writing. See Sidebar 8.10—― Examples of Contracts Required to Be Evidenced by a Signed Writing‖ See Sidebar 8.11 — ―Are Electronic Contracts Considered Writings?‖ Sale of an Interest in Land Emphasize: That although ―sales of interest in land‖ covers a contract to sell land, it includes much more. 1-129
Collateral Promise to Pay Another’s Debt Emphasize: The difference between a collateral promise, i.e., a secondary or conditional promise, and an original promise to pay. Cannot Be Performed within One Year Emphasize: That courts usually interpret the one-year requirement to mean that the contract must specify a period of performance longer than one year. Additional Matter to Consider: The nature of the writing required to satisfy the statute of frauds and the meaning of a required signature. Sale of Goods of $500 or More Emphasize: That under the UCC, the statutes of frauds covers sales of goods of $500 or more and modifications need to be included and must be given in writing. Other Contracts Emphasize: That in addition to basic contracts covered by the statute of frauds, other contracts must be in writing in various states. C. Exceptions to the Writing Requirement Emphasize: That in addition to understanding that the statute of frauds requires certain types of contracts to be in writing, it is important to know there are exceptions to the writing requirement. Part Performance Emphasize: That the doctrine of part performance creates an exception to the requirement that sales of land must be in writing. 1-130
Rules Involving Goods Emphasize: That the UCC creates a number of situations that allow the enforcement of oral agreements involving the sale of goods. See Sidebar 8.12, which lists exceptions to the writing requirement for transactions involving the sale of goods. Judicial Admissions Emphasize: The purpose and application of the Judicial Admissions exception. Cases for Discussion: 1.
Bazak International Corp. v. Mast Industries, Inc., 535 N.E.2d 633 (N.Y. 1989.) Marketing director of seller-defendant met with buyer-plaintiff‘s president. The two negotiated the terms of an oral agreement for certain fabrics. Subsequently, following the seller‘s instructions, the buyer sent five purchase orders by telecopy to the seller‘s office. On each order form was the handwritten language ―As presented by [the seller‘s representative].‖ The seller confirmed having received the purchase orders and never objected to the terms set forth. When the seller failed to deliver the fabrics, the buyer sued. Held: The UCC requires neither explicit words of confirmation nor express references for purchase order forms sent to the seller and kept without objection to be ―a writing in confirmation‖ within the meaning of the merchant‘s exception to the statute of frauds.
2.
McIntosh v. Murphy, 469 P.2d 177 (1970). The plaintiff and the defendant entered into a one-year oral contract concerning a management employment position in an automobile dealership in Hawaii. The plaintiff, relying on the oral promises of the defendant, moved to Hawaii from California. After being employed for 2 1/2 months, the plaintiff was released from employment. He sued the defendant, who raised the defense of the statute of frauds. Held: Substantial reliance on an oral promise is sufficient to remove the case from the statute of frauds. In the particular instance, the court stated that the plaintiff's reliance 1-131
was both substantial and reasonable.
Answers to Review Questions and Problems
Basic Concepts
1.
Contract Law in Private Enterprise The impersonal business dealings necessary to a complex private market economy are difficult to imagine without the assurance that mutual promises will be carried out. Contract law provides that assurance. It also allows the parties to precisely define their performances, thus providing flexibility and precision in business dealings.
2.
Sources of Contract Law a. b.
The common law of contracts is that body of principles that have developed from court decisions. The UCC is the Uniform Commercial Code, adopted by states as the law governing commercial transactions. Since the UCC is adopted in whole or in part in all states, the law of commercial transactions is fairly uniform throughout the United States.
Contractual Classifications and Terminology 3.
Bilateral and Unilateral Contracts a. b.
4.
Bilateral contracts involve an exchange of promises. Unilateral contracts arise when an offeror makes a promise and asks for action in return. Bilateral contracts are more common.
Express and Implied-in-Fact Contracts a.
b.
Students‘ answers will vary. An express contract might arise when the seller (child) promises the supplier (parent) that he/she will clean up the bedroom if he/she can first set up a lemonade stand with the parent‘s cups and lemonade. An implied-in-fact contract to pay for the lemonade arises when buyer (friend) asks for a cup of lemonade. The promise to pay is implied rather than expressed. 1-132
5.
Implied-in-Law or Quasi-Contracts Quasi-contracts (implied-in-law) are found to apply in factual situations when courts want to avoid one party being unjustly enriched at the expense of another party.
6.
Contractual Enforcement Terminology A voidable contract falls into the middle ground of being valid and enforceable in one instance and being invalid and unenforceable in another. A voidable contract is enforceable until such time that someone with the right to do so decides to void the agreement.
7.
Contractual Performance Terminology Tailor has performed the work promised while Pat has not yet performed. Thus, the contract is executed by Tailor while Pat‘s performance remains executory.
Contract Formation
8.
Offer to Contract Condor has legally revoked its offer to Snappy Jack. The statement that the offer expires Friday does not contain a specific promise to hold the offer open and is not an option. The offer may thus be revoked at any time.
9.
Acceptance of Offer A contract has not resulted because Central City‘s credit condition materially changes Fielding Bros.‘ offer.
10. Consideration a. b.
No, Jefferson has not received new consideration from Goldberg to support the promise of modification. Cars would be different because they are goods under the UCC, which allows mutual contract modification without new consideration.
11. Capacity of Parties to Contract Lack of capacity for adults includes intoxication, mental illness, and sickness. Basically, 1-133
these things cause adults not to be able to understand the object of a contract. Judicial adjudication of insanity also creates lack of capacity. 12. Lawful Purpose Edwards Rental cannot disclaim liability for its own negligence. The disclaimer clause is illegal and void. When a Meeting of the Minds is Lacking 13. Fraud or Innocent Misrepresentation The situation involves fraud. The specific element that is demonstrated by Chatter to establish fraud in the scenario is an intent to deceive. Chatter promises to keep the user‘s data private but does not do so and thereby it is an intent to deceive the user. 14. Mistake No, David cannot claim that the contract is void. This is because he should have crosschecked the claims made in the contract and only then entered into the contract. 15. Duress or Undue Influence Yes. For duress to be a defense to a contract, the contract had to be entered into by force or by threat of force. Economic threats that are not based on one‘s assertion of legitimate business consequences will suffice. Contract Form 16. Oral Contracts a. b.
Generally, oral contracts are equally enforceable as written ones. Reducing a contractual agreement to a written form increases the likelihood parties will remember their promises. The occurrence of disputes may decrease. If a contract is written, the parties do not have to worry about statute of frauds compliance.
16. Statute of Frauds a. b.
Requiring contracts to be in a written form and signed by the party being sued reduces the potential for confusion (fraud and deceit) on the court. Contracts for the transfer of an interest in land, contracts promising to pay the debts of 1-134
another, contracts that cannot be performed within 1 year, and contracts involving the sale of goods of $500 or more. 17. Exceptions to the Writing Requirement The statute of frauds does not apply to prevent enforcement of this contract because the goods have been specially manufactured for Elegante.
Business Discussion #1
1.
When does the negotiation end and a binding contract exist? The answer to this question is found in the language used by the buyer and seller. A contract comes into being when both parties have expressed commitments to be bound to specific terms. Of course, as the material in this chapter describes, determining the existence of such commitments takes on many forms and varies from situation to situation.
2. If there is a conflicting language in the buyer’s purchase order and the seller’s confirmation, which language controls? Because the facts involve goods, the terms of the Uniform Commercial Code control. Generally, the seller‘s confirmation controls the terms of the contract unless such form directly contradicts the buyer‘s order, unless the buyer objects to additional terms, or the buyer‘s order explicitly states no changes are allowed. Under any of these exceptions, the disputed terms are subject to further negotiation. 3.
How can you determine when a contract has been performed fully? The satisfaction of conditions creates the analysis for contractual performance. In the factual situation of this ―Business Discussion,‖ the key conditions of performance are tender of delivery by the seller and payment by the buyer.
CHAPTER 9 Contractual Performance and Breach Learning Objectives 1-135
This chapter can be viewed as a continuation of the preceding one. Once again, students will study various aspects of contracts. In particular, this chapter focuses on how contractual provisions are interpreted, how contractual duties are discharged, the effects of nonperformance, and the consequences of breach of contract. Included in the last section is an examination of how contracts can benefit parties other than the original parties of the agreement.
References
Benson, P., The Theory of Contract Law: New Essays. Cambridge University Press (2001). Calamari, J. and J. Perillo, Calamari and Perillo‘s Hornbook on Contracts. Thomson West (2003). Epstein, R.A., Contract: Freedom and Restraint. Garland Publishers (2000). Gilmore, Grant, The Death of Contract. Ohio State University Press (1995). Gordley, J., Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment. Oxford University Press (2006). Matthew, H., Contract Law and Morality. Greenwood Press (1999). Slawson, W.D., Binding Promises: The Last 20th Century Reformation of Contract Law. Princeton University Press (1996). Treitel, G.H., Some Landmarks of Twentieth Century Contract Law. Clarendon (2002).
Teaching Outline
I. Interpretation of Contracts (LO 9-1) A. Rules of Interpretation Emphasize: That common words are given their usual meaning. That if there is evidence that a word has a particular trade usage, courts will give it that meaning. That another rule is that when only one of the parties drafts (writes) a contract, courts will interpret ambiguous or vague terms against the party that drafts them. That in certain cases, courts interpret handwritten terms to control typed terms and typed terms to control printed terms. See marginalia. Sidebar 9.1—―Judging What the Contract Says ‖ on the importance of using clear 1-136
language in contracts. Cases for Discussion: 1.
Weaver v. Royal Insurance Co., 674 A.2d 975 (Sup.Ct. N.H. 1996). When a commercial painter‘s son suffered lead poisoning from paint chips and dust from his father‘s clothing, the father‘s business liability insurer denied coverage under its pollution exclusion clause. Held: The exclusion covering ―discharge, dispersal, release or escape‖ is ambiguous and must be interpreted against the party drafting it, i.e., against the insurer.
2.
Phillips v. Lincoln Nat. Life Ins. Co., 978 F.2d 302 (7th Cir. 1992). An insurance company refused to pay treatment expenses for an ―organic brain syndrome‖ which left the insured with ―horrible social skills‖ and abusive tendencies. The company asserted that the insured‘s condition was a ―mental illness‖ uncovered by the policy. Held: The term ―mental illness‖ under the mental illness coverage limitation is undefined and ambiguous, thus the insured should not be denied coverage for his condition.
3.
New Hampshire Ins. Co. v. Gruhn, 670 P.2d 941 (Nev. 1983). Appellant insurance company had agreed to pay ―all damages suffered by any person. ..‖ When the insured incurred a $5,000 punitive damage award against it, the insurance company refused to pay. Held: One does not ―suffer‖ punitive damages, which are awarded to punish and deter rather than to compensate. The company is not obligated to pay.
B. The Parol Evidence Rule Emphasize: That it does not apply to oral modifications coming after the parties have made the written contract (although statute of frauds may apply). Why courts want to rely on the written contracts as opposed to having parties explain what the writing was meant to say. 1-137
Additional Matters to Consider: The exception (or non-application) of the parol evidence rule as applied to oral modifications of written contracts. II. Performance (LO 9-2) Emphasize: See Figure 9.1 on contractual performance flow chart. That the duty of performance becomes binding at the time parties reached agreement under a contract. The different types of conditions that may appear in a contract, and note their importance. A. Conditions of Performance Emphasize: The difference between condition precedent and condition subsequent. The difference between express conditions, implied conditions, and concurrent conditions. Case 9.1 St. Louis Produce Market v. Hughes, 735 F.3d 829 (8th Cir. 2013), showing how conditions precedent can excuse contract performance. Additional Matters to Consider: Why the concept of concurrent conditions is important when the parties fail to specify the order of performance. The application of express versus implied conditions related to determining how, when, and where a contract is performed. B. Payment, Delivery, Services Tendered in Goods Contracts Emphasize: How payment of money owed, delivery of items promised, and offering to do what is required typically meets the condition stated in a contract. The meaning and importance of tender of performance. Sidebar 9.2 on UCC delivery terms. Additional Matters to Consider: How a tender of performance might satisfy a contractual condition of performance. How tender of performance is generally required to prove clean hands prior to a breach of contract suit. 1-138
C. Discharge of Duties through Performance (LO 9-3) Emphasize: The differences between complete performance, substantial performance, and material breach. Sidebar 9.3 on the levels of performance. Additional Matters to Consider: Provide or ask for examples of when contractual performance is at least partially satisfied even though full performance is not complete. D. Divisibility of Performance Emphasize: The reason why some contracts are divided into smaller increments of performance. The differences between entire and divisible contracts and how they relate to performance. Why employment contracts are viewed differently from construction contracts (the former is divisible and the latter usually is not). Additional Matters to Consider: How the application of divisibility may lessen the damages for nonperformance. III. Excuses for Nonperformance (LO 9-4) A. Force Majeure Emphasize: A force majeure clause is a specifically negotiated part of a contract that excuses or delays a party‘s obligation to perform if a certain extreme event occurs. Sidebar 9.4—―Is a Global Pandemic Considered a Force Majeure?‖ B. Impossibility of Performance and Frustration of Purpose Emphasize: That a party‘s nonperformance is excused because of impossibility of performance. That mere increased difficulty or reduced profitability, however, does not constitute impossibility of performance. Case 9.2 East Capitol View Community Development Corp. v. Robinson (941 A.2d 1-139
1036 (D.C. App. 2008)) provides a good example of a court‘s assessment of the alleged impossibility of a party‘s performance due to financial hardship. Additional Matters to Consider: Regarding death causing impossibility of performance, distinguish between personal service contracts and other executory contracts such as a sales contract. Obviously an entertainer who dies can‘t be forced to perform; however, if a party agrees to sell a car, executes a valid contract, but dies before delivery, the purchaser may demand the car from the heirs at the contract price. C. Commercial Impracticability Emphasize: That the impracticability standard is not as difficult to meet as the impossibility standard. Examples of when unforeseen circumstances may cause the performance of a contract to become impractical. What constitutes impracticability of performance depends upon the circumstances of the situation. Case for Discussion: 1.
Kennedy v. Reece, 37 Cal. Rptr. 708 (1964). The plaintiff contracted with the defendants to drill a well for them. He assured the defendants he could reach the 400-foot level contemplated by the written contract. After two attempts the plaintiff abandoned further efforts to drill the well because of a rock formation. Evidence indicated that the rock could have been drilled through, however. Held: The defendants are liable on a counter claim in the sum of $1,307.15. The court ruled that the plaintiff was not properly discharged from performance under the contract by either the impossibility or impracticability doctrines. The court stated: ―Increased difficulties and heightened costs of a reasonable nature, even though unforeseen, do not render the performance of a contract ‗impracticable.‘‖
D. Waiver or Release Emphasize: The technical distinction between a waiver and a release. Why it is not important to focus on this technical distinction.
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Additional Matters to Consider: When a party to a contract is discharged, the party is released from all further obligations of performance. Case for Discussion: 1.
Barwick v. General American Life Ins. Co. 324 S.E.2d 758 (1984). The deceased was insured under a policy that provided for reduction by one-half in coverage when insured reached age 65. Although deceased had retired at age 65, the insurance company continued to bill his law firm for full premium and continued to list full coverage. However, when the deceased died, the company denied full coverage and sought to refund the excess premiums. Held: The company had waived strict compliance with the policy terms and must pay full coverage.
IV. Breach of Contract (LO 9-5) Emphasize: There are several remedies or solutions available for breach of contract. Figure 9.2 provides a summary of the remedies for breach of contract. Discuss the importance of the negotiated settlement. The importance of mitigation of damages. See Sidebar 9.5 on opening the door to related liability. How a so-called efficient breach can save money and be an effective business decision under certain circumstances. A. Damages Emphasize: The difference between compensatory and consequential damages. Contract theory on punitive damages. How liquidated damages can save time and money when in a contract. The duty to mitigate damages. B. Equitable Remedies
When equitable remedies are appropriate. Available equitable remedies: rescission and restitution, injunctions, quasi-contract, 1-141
and specific performance. Case 9.3 Oliver v. Ball, 136 A.3d 162 (Pa. Super. 2016) on the availability of specific performance as remedy.
C. Efficient Breach Emphasize: What is meant by effective breach. Sidebar 9.6—―Walking Away from a Mortgage‖ Case for Discussion: 1.
Mobil Oil Exploration and Producing Southeast, Inc. v. United States, 120 S.Ct. 2423 (2000). Mobil and other oil companies received the right to explore and develop oil found off the coast of North Carolina. The companies paid the United States $158 million for such rights in the form of 10 year renewal leases. Under the laws (OCSLA and CZMA) in existence at the time of these leases, the Interior Department was required to respond within 30 days of an exploration plan being filed by a lessee oil company, In August 1990 (2 days before the final exploration plan was filed), a new law (the OBPA) became effective. This law required the Interior Department to wait at least 13 months before approving an exploration plan so that an Environmental Sciences Review Panel could study and comment on any exploration plan. The oil companies sued to have their lease payments returned since the U.S. government could not perform the contract as originally written. Issue: Are the oil companies entitled to the return of the $158 million lease payments? Held: Yes. Due to the change in laws, the United States in fact delayed in responding to the exploration plan for 4 years. This delay essentially acted as a repudiation of the original commitment to respond within 30 days of a plan being presented. The appropriate remedy for this repudiation of its obligation is to pay restitution by returning to the oil companies the $158 million in lease payments.
V. Third Parties’ Rights (LO 9-6) A. Beneficiaries Emphasize: The different types of third party beneficiaries: intended, creditor, donee, and 1-142
incidental beneficiaries. B. Assignment and Delegation in Contracts Emphasize: The terms used to designate parties to an assigned or delegated contract: assignor, assignee, delegator, delegate. The importance of notice of assignment. Types of contracts that may not be assigned or delegated. How a novation works. Figure 9.3 on how assignments work. C. Novations A novation is a three (or more) party contract wherein the original contracting parties agree to relieve the obligor from liability by substituting another in the place of this party. VI. Practical Perspective on Contracts Emphasize: Sidebar 9.7 offers some concluding guidance on how to maintain a balanced relationship with one‘s lawyer.
Answers to Review Questions and Problems
Interpretation of Contracts 1.
Rules of Interpretation The warranty protects Gus because the rules of contract interpretation say that a handwritten term in a contract controls a printed term.
2.
The Parol Evidence Rule The parol evidence rule prevents Caryn from proving in court there was an oral agreement for a one-year warranty. Caryn should seek to reopen negotiations and attempt to create a modification to the written contract. Courts are willing to hear testimony about changes to the written contract. 1-143
Performance 3.
Conditions of Performance a.
b.
4.
Payment, Delivery, Services Tendered a. b.
5.
Tendering performance means a party offers to perform its contractual obligations. The impact of tendering performance typically satisfies the condition that the other party must perform. A seller‘s tender of delivery usually means the buyer becomes obligated to pay.
Substantial Performance a. b.
6.
Conditions determine when a party becomes obligated to perform the promises made. Without conditions, the timing of performance would be much more difficult to know with any degree of certainty. The three most common conditions in contracts are precedent, subsequent, and concurrent. These conditions might also be classified as expressed by the parties or implied by the courts.
Since there has been substantial contractual performance by Ace, Realty cannot rescind the contract. It can only sue for repair damages. Realty might request a court order that Ace should specifically perform the contractual promise made. It could also ask for compensatory damages.
Divisibility of Performance Employment contracts can be viewed as installments divided into pay periods. Construction contracts may involve payments due at certain points of progress; however, a finished structure or remodeling job is the desired end result. Because the typical employment relationship is not for a prescribed product to be produced, it is viewed as divisible. Because construction contracts are usually for a finished result, it is not viewed as divisible.
Excuses for Nonperformance 7.
Force Majeure Student answers will vary, but typical force majeure events include natural disasters, such as hurricanes, floods, or epidemics, and political turmoil, such as strikes, terrorist attacks, war 1-144
or even government expropriation (eminent domain). 8.
Impossibility of Performance The destruction of essential materials, the death of a key party, and the illegality of the contract‘s purpose are examples that justify excusing nonperformance due to impossibility.
9.
Commercial Impracticability Westinghouse might have used the defense of commercial impracticability if they had gone to trial.
10. Waiver or Release Both waivers and releases excuse a contracting party for not performing. They result in the discharge of contractual obligations. Breach 11. Damages and Equitable Remedies a. Money damages are preferred by courts and put the non-breaching party in the position they would have been in if the contract had been fully performed. Equitable remedies are available when money damages will not suffice. b. David would owe $1,000 in compensatory damages. This would put Ellysa in the position that she would have been in had David not breached. c. The victim of a contract breach must mitigate damages when possible. Mitigating damages requires the victim to take reasonable steps to reduce them, reducing waste in the contract. d. Only if the car is an original one-of-a-kind and a similar one could not be found on the market. 12. Efficient Breach Student answers will vary as to the ethicalness of efficient breach. Third Parties’ Rights 1-145
13. Beneficiaries A contract that was intended to benefit a third party may be enforceable by the third party because it is for that person that the contract was made. An incidental beneficiary may benefit from a contract, but because the person was not contemplated in the contract, they do not receive rights under the contract. 14. Assignment and Delegation in Contracts a. Top Gun would have the defense against Zenith because Zenith would only be assigned the rights that Franchetti had. b. Yes. When one delegates a duty under a contract, the delegator is still primarily liable for performance under the contract. 15. Novations A novation is a three (or more) party contract wherein the original contracting parties agree to relieve the obligor from liability by substituting another in the place of this party.
Business Discussion #1 1.
Is the “deal” you make an enforceable contract? Because of the Statute of Frauds writing requirement for a sale of goods of $500 or more, this agreement is not likely to be enforceable. Point out that many sales representatives lack the authority as agents to make binding contracts on behalf of their employers. This in turn creates potential liability for the sales representative (agent) for breach of the warranty of authority if the agreement is enforceable but beyond the agent‘s authority.
2.
Does the mistake you made permit you to get out of an enforceable contract? Generally, a party cannot rescind an enforceable agreement due to a unilateral mistake. If the customer knew or should have known of the mistake, Misco could rescind an otherwise enforceable contract.
3.
What do you think will happen in this situation? 1-146
With most business agreements, the parties work out their differences rather than sue on even enforceable contracts. Reputation in the industry and future goodwill between seller and buyer may be more important than damages for a single breach of contract. In any event this ―deal‖ is not likely an enforceable contract.
Chapter 10 Torts Affecting Business Learning Objectives The purpose of this chapter is to introduce students to noncontractual civil wrongs as they apply to business. The chapter develops the main categories of torts: intentional torts, negligence torts, and strict liability torts. Products liability is covered under strict tort liability. Through assignment of rights and duties, the law affects the way wealth is distributed in society. Use the tort chapter, and the recent changes in tort law, to illustrate this aspect of the law. Consider that the role of tort law in a property-based legal system is both to compensate owners for trespasses on what they own (including in that broad sense, ownership of themselves) and to define the boundaries of what they own, especially as they own the uses of their resources. As resource uses are defined by the courts (or legislatures) as legally wrong, wealth is redistributed.
References
Carroll, Stephen J., Assessing the Effects of Tort Reform. Rand Corp. (1987). Collin, Thomas J., Punitive Damages and Business Torts. ABA (1998). Dobbs, Dan, et al, Hornbook on Torts, 2nd ed. West (2016). Epstein, Richard A., Cases and Materials on Torts. Aspen Pub. (2008). Friedman‘s Practice Series—Torts eBook. Precedent Press (2005). Glannon, Joseph W., The Law of Torts: Examples and Explanations, 3d ed. Aspen (2005). Hans, Valerie P., Business on Trial: The Civil Jury and Corporate Responsibility. Yale (2000). O'Connell, Jeffrey, Tort Law: No-Fault and Beyond. M. Bender (1976). Schwartz, Victor E., et al, Prosser on Torts, 11th ed. Foundation Pr. (2005). Schwartz, Victor E., et al, Torts: Cases and Materials, 10th ed. West (2001). Stapleton, Jane, Product Liability. Butterworths (1994). Williams, C. Arthur, Workers‘ Compensation Systems Around the World. (1991).
Teaching Outline 1-147
I. Introduction Emphasize: That legally a tort is a civil wrong other than a breach of contract. That behavior that constitutes a tort is called tortious behavior. II. Intentional Torts (LO 10-1) Emphasize: That intent is defined as the desire to bring about certain results. Sidebar 10.1—―Types of Intentional Torts‖ Sidebar 10.4—Often the same circumstances can lead to several torts A. Assault and Battery Emphasize: The civil distinction between assault and battery. That ―illegal‖ means that touching is done without justification and without the consent of the person touched. Case 10.1: Harper v. Winston County 892 So.2d 346 (Ala. Sup. Ct. 2004) Cases for Discussion: 1. 2.
A fraternity hazing instance involving the paddling of a pledge led to a tort action for battery. An award of $275,000 in compensatory damages for false imprisonment and battery against the District of Columbia and two city police officers was not excessive when the plaintiff was a 38-year-old black man who held two Masters‘ degrees, who had served as a Peace Corps volunteer, and who had never been arrested. The plaintiff was suddenly accosted by plain-clothes officers, subjected to degrading remarks, and kicked into a marked police car that was driven to a robbed bank. When the officers learned that the plaintiff was not the robber, he was nevertheless booked for assault. The plaintiff was confined to bed for a week recovering from the injuries suffered. District of Columbia v. Gandy, 450 A.2d 896 (1982).
B. Intentional Infliction of Mental Distress Emphasize: That intentional infliction of mental distress is a battery to the emotions. That usually, one who sues on the basis of an intentional infliction of mental distress 1-148
must prove that the defendant‘s outrageous behavior caused not only mental distress but also physical symptoms, such as headaches or sleeplessness. How this tort can occur in the workplace.
Cases for Discussion: 1. Walters v. Mintec/International, 53 LW 2488 (CA3, 1986). In this case a hoist drum broke, which killed one workman and injuring another. Held: The second workman could sue under strict product liability for the physical manifestations of the emotional injury caused by the death of the first workman. 2. Ellington v. Coca Cola Bottling Co. of Tulsa, 809 P.2d 69 (Okla. App. 1986). The plaintiff became physically ill after drinking from a soft drink bottle containing what appeared to be a worm bit but was in fact a piece of candy. Held: The plaintiff may recover for psychologically induced injury. Although there must be physical suffering, it need not precede the psychological injury. 3. St. Elizabeth Hospital v. Garrard, 730 S.W.2d 649 (Tex. 1987). Parents sued a hospital and a doctor for mental anguish due to the improper disposal of their stillborn infant. Held: Texas joins seven other states in permitting negligent infliction of mental distress without a showing of physical symptoms of injury. 4. Hustler Magazine v. Falwell, 108 S.Ct. 846 (1988). Hustler magazine parodied minister Jerry Falwell by showing him having sex with his mother in an outhouse. Held: The first amendment prohibits claims for intentional infliction of mental distress arising from constitutionally protected parody. C. Invasion of Privacy Emphasize: 1-149
That the tort of invasion of privacy is one that is still in the early stages of legal development. That as the statutes and court cases recognize it, the tort at present comprises three principal invasions of personal interest (appropriation of the plaintiff‘s name or likeness for his or her own use; and the defendant‘s public disclosure of highly objectionable, private information about the plaintiff). An invasion of any one of these areas of interest is sufficient to trigger liability. That before using anyone‘s picture or name, an advertiser must obtain a proper release from that person to avoid possible liability. Case 10.2 Ehling V. Monmouth-Ocean Hospital Service Corp. 872 F.Supp. 2d369 (D.N.J 2012)
Cases for Discussion: 1.
After the plaintiff modeled lingerie at Hipsters, a social club for large women and men who admire them, her picture appeared in Plumpers, an adult magazine featuring large women. The picture was accompanied by an article that described the Hipsters‘ gathering as 5,000 pounds of ―Sex-Starved Fatties.‖ In 2000 a jury in Marietta, Georgia, awarded the plaintiff $800,000 for invasion of privacy and defamation. Is there a free press and speech issue here? Did the plaintiff become a ―public figure‖ by modeling?
2.
Mendosa v. Time Inc., No. 87-0371 L (2/23/88). A man claiming to be the subject of a famous Life magazine photo showing a sailor kissing a nurse on V-J day sued when the publisher offered to sell copies of the photo. Held: The photo comes within the coverage of a state law forbidding the unauthorized use of a person‘s likeness or name for trade purposes.
3.
Eddy v. Brown, 54 LW 2477 (1986). An employee sued his employer for disclosing to several of his co-workers that he was undergoing psychiatric treatment. Held: Such disclosure was not of sufficiently public nature to constitute invasion of privacy under Oklahoma law. However, an employer‘s disclosure of employee‘s paranoid condition to other employees, which disclosure violated company‘s own internal standards, did state a cause of action under Massachusetts‘ right to privacy statute. Bratt v. IBM (CA1, 1986).
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D. False Imprisonment and Malicious Prosecution Emphasize: The relationship between false imprisonment and the problems of merchants with shoplifters. That malicious prosecution, also known as false arrest, arises from causing someone to be arrested criminally without proper grounds. E. Trespass Emphasize: That the famous British constitutional historian Frederick Maitland wrote, ―Trespass is the fertile mother of actions.‖ By this he meant that many of our modern day causes of action in tort—like battery—come from trespass. How trespass can be a crime as well as a tort. Case for Discussion: 1.
Lloyd Corp. Ltd. v. Leheiffen, 57 LW 2685 (1989). When a few people entered a shopping center to gather signatures for a petition to initiate public lawmaking, the owner sued to enjoin them from continuing to enter. Held: The Oregon Supreme Court held that a strong public interest will be seriously injured if the signature-gathering activity is completely blocked. Substantial interference with commercial activity may be enjoined, but solicitation of signatures does not in and of itself constitute substantial interference. A blanket injunction is denied, however the trial court may issue an injunction imposing reasonable restrictions. Dissent: The majority has overruled over 100 years of good trespass injunction law.
F. Conversion Emphasize: The definition of conversion. That conversion deprives owners of their lawful right to exclude others from such resources. The case in the marginalia where conversion was found for a person driving a rental car to Mexico (against the terms of the lease) where it was damaged.
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Cases for Discussion: 1.
Ryno v. Tyra, 752 S.W.2d 148 (1988). The plaintiff, an automobile buyer, agreed to buy the defendant car dealer‘s BMW automobile for $125,000. The defendant then proposed a ―double or nothing‖ wager on a coin flip. The plaintiff won the coin flip, whereupon the defendant handed the plaintiff the keys to the car and said, ―It‘s yours.‖ The defendant also gave the plaintiff the German title to the car. Several times subsequently the defendant worked on the car, each time returning it to the plaintiff. Finally, however, he kept the car. When the plaintiff sued, the defendant argued that the wager was a jest. Held: The Texas Court of Appeals held that the defendant is guilty of conversion. The defendant made a gift of the car to the plaintiff.
2.
Steenbergen v. First Federal S&L of Chicasha, 56 LW 2378 (1987). An S&L allowed the plaintiff‘s estranged daughter to pick up and cash a check held for the plaintiff. Held: The S&L is liable for conversion.
G. Defamation Emphasize: The distinction between slander and libel. That because of the First Amendment, special rules regarding defamation apply to the new media. Why plaintiffs‘ verdicts in defamation cases are frequently overturned on appeal. How defamation has a higher standard (statement must be made with ―malice‖) for public figures. See Sidebar 10.2. Additional Matters for Discussion: Libel-defense lawyers assert that they are seeing an increase in defamation suits against newsletters and other small publications. Procter & Gamble Co. fired Don Hagler, accusing him of trying to steal a telephone and posted notices on eleven bulletin boards depicting him as a thief. Hagler sued and a jury awarded him $15.8 million for defamation. A California jury awarded actress Elke Sommer $2 million for defamation because actress Zsa Zsa Gabor and her husband told German publications that Sommer was a 1-152
broke Hollywood has-been. A jury awarded employee Jean Ransdell $5.5 million against her former employer Russ Berrie & Co. for defamation for telling other employees that she had been fired because she had padded sales orders.
Cases for Discussion: 1.
Philadelphia Newspapers, Inc. v. Hepps, 106 S.Ct. 1558 (1987). The defendant newspaper published accusations that plaintiff, who owned snack stores, was connected to organized crime. A Pennsylvania statute required that a defendant prove the truth of defamatory statements to escape judgment. Held: Although the plaintiff is a private figure, he cannot constitutionally recover damages without providing that the defamatory statements are false.
2.
Bose Corp. v. Consumers Union, 104 S.Ct. 1949 (1984). The plaintiff sued Consumers Union for publishing an article stating that sound from the plaintiff's speakers tended to ―wander about the room.‖ Held: Appellate judges may exercise independent judgment in evaluating the record for actual malice in spite of the Federal Rules of Civil Procedure that allow a court to set aside a trial court‘s findings of fact only if it is ―clearly erroneous.‖
3.
McDonald v. Smith, 53 LW 4789 (1985). The respondent was being considered for a U.S. attorney‘s position. Petitioner wrote letters to President Reagan, with copies to other government officials, accusing respondent of ―violating civil rights,‖ committing ―fraud and conspiracy,‖ and engaging in ―extortion of blackmail.‖ Respondent failed to get the U.S. attorney‘s position and sued petitioner for $1 million. Petitioner asked for judgment on the pleadings, claiming that the First Amendment‘s petition clause gave him an ―absolute privilege‖ to write his letters. Held: No such absolute privilege exists. The petitioner can be held in damages for libel if ―malice‖ consistent with N.Y. Times v. Sullivan is shown.
4.
Brown & Williamson Tobacco Co. v. Jacobson, 56 LW 2147 (1987).
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The commentator for a Chicago TV station asserted that Viceroy cigarette advertising deliberately attempted to relate cigarette smoking to ―pot, wine, beer, and sex‖ in order to attract young smokers. Held: Compensatory and punitive damages of $3 million were appropriate since there was clear and convincing evidence that the defendants acted with actual malice, knowing the falsity of the assertions. 5.
Dun and Bradstreet v. Greenmoss Builders, 105 S.Ct. 2939 (1985). Credit reporting firm Dun & Bradstreet issued a false credit report to plaintiff‘s creditors. Thereafter D&B issued a corrective report, but plaintiff was dissatisfied and sued anyway. When the jury awarded compensatory and punitive damages, the case was appealed on the constitutional issue of whether the First Amendment requires a showing of ―actual malice‖ before damages can be awarded against a nonmedia defendant. Held: The Supreme Court held that the reduced value of commercial speech involving no matters of public concern warrant these damages.
H. Fraud Emphasize: That a fraud is an intentional misrepresentation of a material fact that is justifiably relied upon by someone to his or her injury. That fraud applies in many different situations. That an individual can also prove fraud by giving evidence that another individual has harmed him or her by failing to disclose a material (important) hidden fact. Discuss when one is under a duty to disclose or not to conceal. That following the financial collapse that began in 2007, hundreds of plaintiffs filed fraud lawsuits against banks, other financial institutions, and various of their executives based on concealment. That fraud is a broad term that is used in many different areas of law. See Sidebar 10.3—―Tort or Crime? or Both?‖ Case for Discussion: 1. A jury awarded Food Lion $5 million for fraud and trespass when ABC reporters misrepresented themselves in order to get jobs and do a story on Food Lion‘s alleged sale of out-of-date meat.
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Additional Matters for Discussion: According to the Insurance Research Council, as many as one-third of all auto bodily injury liability claims appear to involve fraud (inflated or phony claims). Many companies now use a software program called ―Colossus‖ to compare accident claims with a database of similar cases and to recommend settlements or to detect fraudulent claims (see WSJ, 1/3/03). Fraudulent claims in the aftermath of Hurricane Katrina were estimated at $1 billion. I. Interference with Business Relations Injurious Falsehood Emphasize: That trade falsehood, sometimes called trade disparagement or product disparagement, is a common business tort. Additional Matter for Discussion: Procter & Gamble filed injurious falsehood lawsuits against a number of individuals that alleged that the defendants were spreading statements that P&G was associated with satanism. P&G also announced that it would remove its moon-and-stars logo from its products to help stop the satanism rumors. Intentional Interference with Contractual Relations Emphasize: How intentional interference with contractual relations might occur. Cases for Discussion: 1.
2.
On her TV show, Oprah Winfrey made statements questioning the eating of beef in light of ―mad cow‖ disease. Texas cattle interests sued her for trade disparagement. The jury found Winfrey not liable. Point out the free speech issues. To emphasize the extent and seriousness with which business firms seek out information about other firms, share with the class ―Call It Mission Impossible Inc.— Corporate-Spying Firms Thrive,‖ WSJ, 8/3/00, p. B1. Note that the Economic Espionage Act of 1996 makes theft of trade secrets a federal felony. Is raiding garbage theft? Probably, yes if it is on private property. Otherwise, no.
III. Negligence (LO 10-2)
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Emphasize: That the second major area of tort liability involves unreasonable behavior that causes injury is called negligence. Sidebar 10.5—―Elements of Negligence‖ A. Duty of Care Emphasize: That a critical element of all tort cases is duty. The distinction between duty that arises out of conduct and duty to avoid injury through nonconduct. Case 10.3: Iannelli v. Burger King Corp. 200 N. H. Lexis 42 (N. H. Sup. Ct. 2000)
Cases for Discussion: 1.
Garofalo v. Lambda Chi Alpha, 616 N.W.2d 647 (2000). A student died while taking the fraternity pledge at a fraternity house following excessive consumption of alcohol. His estate sued the fraternity. Held: The Iowa Supreme Court held that no showing of facts establish a special relationship.
2.
Hamman v. Maricopa County (1/19/89). A stepfather brought his stepson in for psychiatric evaluation. The treating psychiatrist said the stepson was harmless and refused to admit him. The psychiatrist did not refer to the stepson‘s previous psychiatric hospital records, which would have shown that he was jealous of his stepfather. The stepson was released and subsequently attacked the stepfather, who sued. Held: The Arizona Supreme Court held that a psychiatrist has the duty to exercise reasonable care toward foreseeable victims of a dangerous patient, not just to specific third parties against whom the patient has made specific threats.
3.
Leesley v. West, 16 PSLR 301 (1988). A woman claimed that a drug caused her to have severe internal bleeding. She sued the pharmacy for failing to warn her of the dangers. 1-156
Held: The pharmacy has no duty to warn. Only the prescribing physician has that duty, says an Illinois appellate court. 4.
Many colleges are being sued by students who injure themselves. The plaintiffs rely on the special relationship between college and student and argue that the colleges should have protected them better.
5.
Wright v. Webb, 56 LW 2319 (1987). A woman was criminally assaulted in a motel parking lot. She sued the motel for negligence for failing to protect a business invitee. Held: A business investor had no duty to protect absent knowledge that criminal assaults are taking place or are about to take place. There was no previous history of criminal assaults near the motel. But lawsuits suing business owners for inadequate security are increasing.
B. Unreasonable Behavior—Breach of Duty Emphasize: Judge Learned Hand‘s definition of negligence (unreasonable behavior). Sidebar 10.6—―Medical Malpractice Claims‖ Examples of Negligence Emphasize: That the failure to exercise reasonable care can cost a company substantial sums. Additional Matter for Discussion: Dr. Conrad Murray was convicted of involuntary manslaughter in the death of Michael Jackson. Point out how Dr. Murray‘s medical malpractice led to a criminal conviction. Willful and Wanton Negligence Emphasize: That a special type of aggravated negligence is willful and wanton negligence. The significance of this type of negligence is that the injured plaintiff can recover punitive damages as well as actual damages. Sidebar 10.7—―Strip Search Hoax Costs McDonald‘s $6.1 Million‖ 1-157
Case for Discussion: 1. In 1999 the accounting firm Ernst & Young LLP agreed to pay Cendant Corp. $335 million to settle a negligence lawsuit alleging that the firm failed to detect an accounting fraud by CUC International, which was later acquired by Cendant. The lawsuit specifically alleged that Ernst & Young failed to review quarterly reports by CUC subsidiaries, did not require adequate documentation, and failed to review the company‘s general ledgers. Additional Matter for Discussion: According to the Institute for Medicine of the National Academy of Science (1999), medical malpractice accounts for between 44–98 thousand patient deaths annually. C. Causation in Fact Emphasize: The definition of cause in fact. Point out that courts leave questions of cause in fact almost entirely to juries. The concept of joint and several liability. Cases for Discussion: 1. Mitchell v. Gonzales, SO18678 (1992). A boy who could not swim had ridden a surf-board craft into a lake with an older friend. The boy drowned. The estate sued the friend and the friend‘s parents for lack of proper supervision. The jury was instructed that the death must not have occurred ―but for‖ the negligence. Held: The California Supreme Court held that the defendants‘ conduct must only be a ―substantial factor‖ in bringing about the harm. 2. The New York Court of Appeals adopted the market share liability theory in Hymowitz v. Eli Lilly and Co. (4/4/89). 3. Zafft v. Eli Lilly and Co., No. 65685, 9/11/84. Held: The Missouri Supreme Court ruled that persons alleging injury from DES cannot sue DES manufacturers without identifying which particular manufacturer in fact 1-158
caused the plaintiff‘s injury. 4. Minnich v. Ashland Oil Co., 53 LW 2468 (1985). In a case involving two sellers of a flammable chemical, the Ohio Supreme Court ruled that when the plaintiff was unable to identify which of the two companies sold the chemicals that exploded and burned him, both sellers could be held liable under the concept of alternative liability since both had failed to warn of the chemical‘s danger. 5. Abel v. Eli Lilly and Co., 343 N.W.2d 164 (Mich. 1984). The Michigan Supreme Court in a DES case ruled that when the plaintiff brings all possible tortiously acting defendants into court, but only one defendant actually caused plaintiff‘s injury, that the burden shifts to the defendants to prove that they did not cause the injury. Otherwise, they have joint and several liability. D. Proximate Causation Emphasize: That defining proximate causation in terms of foreseeable risk creates further problems about the meaning of the word foreseeable. Sidebar 10.8—―Explosion on the Long Island Railroad‖ Cases for Discussion: 1.
McPeake v. William T. Cannon, Esq. (1/26/89). A man was convicted of rape and immediately jumped to his death through a courtroom window. The family of the man sued his lawyer for negligence. Held: a Pennsylvania Superior Court held that whether or not the lawyer botched the deceased‘s defense, the suicide was unforeseeable and thus not proximately caused by the lawyer‘s conduct.
2.
Isaacs v. Huntington Memorial Hospital, 53 LW 2464 (1985). The California Supreme Court overruled prior California cases that had established the rule that a land owner is not required to anticipate criminal activities on his or her property unless there had previously been such activities on the property. The particular case involved a doctor who was shot during a robbery attempt in a hospital parking lot. 1-159
The doctor alleged inadequate security measures against the hospital and showed evidence that the hospital was located in a high crime area. The California high court held that it was not necessary for prior instances of criminal activity to have occurred in order that this instance be foreseeable. E. Defenses to Negligence Contributory Negligence Emphasize: How the doctrine of contributory negligence has been modified by comparative responsibility. Ask the students what meaning this has to the business community. Assumption of Risk Emphasize: The distinction between assumption-of-the-risk and contributory negligence. Use the two doctrines to explain how legal doctrines sometimes overlap. Cases for Discussion: 1.
Law v. Superior Court, 56 LW 2416 (1988) The plaintiff was injured in an automobile accident and sued the defendant. The defendant argued that the plaintiff‘s lack of seat belt use should be considered in reducing damages under Arizona‘s comparative negligence law. The plaintiff argued that lack of seat belt use did not cause the accident. Held: The lack of seat belt use enhanced the injury and may be considered in the comparative negligence evaluation.
2.
Lowe v. Estate Motors, Ltd., 56 LW 2108 (1987) An automobile passenger injured in an accident sued the manufacturer of the automobile for defective design and uncrashworthiness. The manufacturer raised the passenger‘s comparative negligence in failing to wear a seat belt. Held: The failure to wear a seat belt in Michigan is appropriately considered by the jury both in determining comparative negligence and in evaluating the design of the automobile. Oregon decided a similar way in Dahl v. Bayerische Motoren Werke, 16 1-160
PSLR 81 (1987). 3.
Martin v. Johns-Manville Corp., 14 PSLR 11 (1986). An asbestos-injured plaintiff sued. Held: The trial judge properly instructed the jury that they could reduce a judgment award by the percentage of the plaintiff‘s disability attributable to cigarette smoking.
4.
Murray v. Ramada Inn, 56 LW 2517 (1988). The plaintiff was injured while diving into a motel swimming pool. Held: The adoption of comparative fault abrogates the assumption of risk in Louisiana.
5.
Insurance Co. of North America v. Pasakarnis, 415 So.2d 447 (Fla. 1984). Defendant‘s car struck plaintiff‘s. Plaintiff was thrown from his car and injured. Held: By the Florida Supreme Court: Jury should be allowed to consider the fact that plaintiff was not wearing his seat belt to reduce plaintiff's damages recovery under comparative fault principles.
6.
Almost all states have adopted comparative responsibility in one of its forms. However, the Supreme Court of Alabama specifically rejected it and kept contributory negligence as a bar to recovery.
IV. Strict Liability in Tort Emphasize: That strict liability is a catchall phrase for all legal responsibility for injury-causing behavior that is neither intentional nor negligent. A. Strict Products Liability Emphasize: That a major type of strict tort liability is strict products liability, for the commercial sale of defective products. That there are two kinds of defects: production defects and design defects. 1-161
That under strict products liability, contributory negligence is not a defense but assumption of the risk is. That in recent years many states have changed or modified the rules of product liability. Sidebar 10.9—―Tort Reform‖ That currently in most states, design defect cases are decided according to reasonableness standards. This includes cases based on design defects, failures to warn adequately and testing inadequacies. Case 10.4: Branham v. Ford Motor Co. 701 S.E.2d 5 (S.C. Sup. Ct. 2010)
Additional Matters for Discussion: Asbestos litigation continues to be a product-liability mainstay. Said W.R. Grace & Co.‘s senior litigation counsel: ―Virtually every company involved in traditional basic industries is a potential defendant in asbestos litigation.‖ A January 27, 2003 article in the Wall Street Journal reports that there was once over 3000 products with asbestos in them. Currently, there are some 8000 companies named in asbestos litigation with over 200,000 pending claims. In 1999 American Home Products Corp. agreed to pay as much as $3.75 billion to settle some 6000 lawsuits over the diet drugs Pondimin & Redux, which are part of the combination drug known as ―fen-phen.‖ Fen-phen use was related to heart-valve disease and an often fatal lung condition. Not included in the settlement were 100 of the most serious cases that could cost ATP as much as $1 billion. According to Tellinghaust-Towers Perrin, the U.S. tort system is the world‘s most expensive, accounting in 1995 for 2.2 percent of Gross Domestic Product. According to a 1995 study from the National Bureau of Economic Research, Inc., in states that pass tort reform productivity and employment rise by 7 to 12 percent. In 2003, there were more than 10,000 mold-related lawsuits pending. For a look at one possible products liability trend, try ―Trial Lawyers‘ Next Target: The Paint Industry,‖ WSJ, 10/18/99, p. A49 concerning lead-based paint. According to the New York Times, 9/6/03, silicosis lawsuits are growing by tens of thousands. B. Ultrahazardous Activity Emphasize: That in most states, the courts impose strict liability in tort for types of activities they call ultrahazardous. Sidebar 10.10—―The Great Molasses Flood‖ Additional Matter for Discussion: Some states have labeled certain breeds of dog, such as Rottweilers and Pit Bulls to be dangerous animals. Would a student still be comfortable owning one of these in light of 1-162
the potential liability? C. Other Strict Liability Torts Emphasize: How the increase in dram shop act cases illustrates changing social attitudes. Strict liability for common carriers and the five defenses available to common carriers. IV. Damages (LO 10-3) Emphasize: Why ―the crucial controversy in personal injury torts today‖ is the area of damages. For dramatic examples of the size of recent awards, refer to Sidebar 10.11. A. Compensatory Damages Emphasize: That the purpose of compensatory damages is to make the plaintiff whole again, at least financially. Discuss the three major types of loss included under this type of damages. That currently, compensatory damage awards for pain and suffering are very controversial. Case for Discussion:
Discuss how cases with strange-sounding facts and damages lead to run-away-litigation stories. One of the best-known such cases occurred in 1994 when a New Mexico woman was awarded $2.7 million after suing McDonald‘s for burns suffered when coffee she bought at a drive-through window spilled in her lap. A judge later lowered the award to under $500,000. Before trial, the plaintiff had offered to settle the case for $20,000. McDonald‘s had heated the coffee to 190 degrees in spite of the fact that coffee is normally drunk at 120-130 degrees. McDonald‘s had received over 700 complaints regarding the superheated coffee. In 2000 a plaintiff in Knoxville, Tennessee, sued McDonald‘s, alleging that an ―extremely hot‖ pickle from a hamburger permanently scarred her chin.
B. Punitive Damages Emphasize: When punitive damages are awarded. That presently, there is much controversy about how appropriate it is to award punitive 1-163
damages against corporations for their economic activities. That most companies carry liability insurance policies that reimburse them for ―all sums which the insured might become legally obligated to pay.‖ That almost no other country in the world except the United States permits civil juries to award punitive damages. Sidebar 10.12—―Punitive Damage Guidelines‖
Additional Matters for Discussion: Judges often reduce punitive damages. In one case, a Wisconsin court reversed a $94 million punitive damage award to the families of three ironworkers killed when a crane collapsed during construction of Miller Park, the baseball stadium. The court ruled that the defendant was negligent but not intentional in finding it too windy to install a piece of the stadium‘s retractable roof the day the workers were killed. In another case, a California state court jury ordered General Motors to pay $4.9 billion, mostly in punitive damages following a gas tank explosion in their 1979 Malibu. The trial judge reduced the award to $1.2 billion. It was appealed further. A survey of 10,278 tort trials found that punitive damages were imposed in only 3.3% of the 4,879 trials won by the plaintiff. A study published in the Cornell Law Review concludes, contrary to common assumption, that judges rather than juries are more likely to side with plaintiffs in several major tort categories of litigation. The study examined 16,858 federal cases from 1979–1989 involving personal injury, including auto accidents, medical malpractice, and products liability. E.g., in product liability cases plaintiffs won 48% of the time in non-jury trials but only 28% before a jury. The size of the awards was approximately equal for both non-jury and jury situations.
Answers to Review Questions and Problems Intentional Torts 1.
Assault and Battery The employee can sue her employer for battery by showing that the touching was unwanted and offensive.
2.
Intentional Infliction of Mental Distress In business, intentional infliction of mental distress tort has most commonly followed the firing of an employee.
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3.
Invasion of Privacy The three invasions are (1) misappropriation of a person‘s likeness, (2) intrusion of a person‘s physical solitude, and (3) the public disclosure of highly objectionable, private information about a person.
4.
False Imprisonment and Malicious Prosecution False imprisonment is the intentionally confining of a person against his or her will and without a privilege. Malicious prosecution involves filing criminal charges against someone without a legal basis for doing so. It most frequently arises in shoplifting cases.
5.
Trespass From the tort perspective, the homeowners might pursue the tort of trespass. Note: They may also have a nuisance claim (See Chapter 7).
6.
Conversion Universal is strictly liable to Bartley even for an act of God if the goods are converted. Moving them from one warehouse to another without permission constitutes conversion.
7.
Defamation The comments made by Joan constitute defamation. If they are true, the defendant may use the affirmative defense of truth. Otherwise, the defendant is likely liable.
8.
Fraud In suing for the tort of fraud, the plaintiff‘s advantage is that he or she can obtain damages, including punitive damages.
9.
Interference with Business Relations The individual can sue for damages for intentional interference with contractual relations. The individual might also seek an injunction to prevent Sly from competing against his or her company using these employees.
Negligence
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10. Duty of Care a. b.
No. One has no legal duty to warn in this case without establishing a special relationship. Yes. In a place of employment, the special relationship between employer and employee places a duty of care on the employer to warn the employee.
11. Unreasonable Behavior—Breach of Duty In litigation, the jury determines if the defendant‘s behavior is unreasonable. 12. Causation in Fact a. b.
It means that there is no single causation for any event. The judge instructs the jury that to be causation in fact, the causation must contribute ―materially‖ to the injury.
13. Proximate Causation The issue in proximate causation is not whether the causation is a material contributing factor, but whether it is a ―foreseeable‖ cause. 14. Defenses to Negligence The plaintiff will be entitled to a $150,000 award. Strict Liability in Tort 15. Strict Products Liability On the one hand is the issue of whether the door latch‘s design is ―defective.‖ On the other hand is the issue of Joe‘s comparative responsibility for the accident because of his failure to wear a seatbelt. 16. Ultrahazardous Activity Philips Phosphate is strictly liable because of its ultrahazardous activity of artificially maintaining a large body of fluid. 17. Other Strict Liability Torts 1-166
The five instances in which common carriers are not strictly liable for damage to transported goods are: (1) acts of God; (2) acts of an alien enemy; (3) acts of a public authority; (4) the inherent nature of the goods; and (5) misconduct of the shipper. Damages 18. Compensatory Damages (1) Past and future medical expenses; (2) past and future loss of earnings; (3) past and future economic loss. 19. Punitive Damages Bob can recover compensatory damages. If he can prove willful and wanton negligence, Bob can also recover punitive damages.
Business Discussion #1 1.
Is the intruder liable for what he has done? The intruder is civilly liable in tort for trespass and battery. He has also committed several crimes.
2.
Do you have legal responsibilities to Sharon and Darryl? The owner of University Heights Apartments has a special relationship (landlord-tenant) with Sharon, hence he or she has a duty to take reasonable steps to protect her. Particularly if the sliding glass door lock was inadequate and there have been prior breaking and entering incidents or incidents of assault in the neighborhood, the owner may be liable for negligence. Darryl may be entitled to worker‘s compensation for his injuries since his injuries seem to arise out of and in the course of employment. If Darryl is not covered by worker‘s compensation, he, too, may be able to sue the owner successfully for negligence.
3.
What should you consider doing at your apartments? The owner should consider improving door locks, adding security lights, etc. If the area is problematic, hiring security guards or an agreement with local law enforcement regarding increased patrols should be considered.
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Business Discussion #2 1.
Has Mayfair done anything legally wrong? Mayfair‘s material nondisclosure concerning the likely strike is under the circumstances a fraudulent concealment.
2.
Is your legal remedy against Mayfair limited to breach of contract? No, fraud is an intentional tort and is a cause of action separate from breach of contract.
3.
Will you be able to get damages from Mayfair other than a refund of your prepayment? Explain. Yes, if you prove fraud, you may be entitled to punitive damages.
Chapter 11 Intellectual Property Learning Objectives The objective of this chapter is to instill an appreciation for the institution of property, its importance to the economic system, and its creation of incentives for investment. The forms of intellectual property including trade secrets, patents, copyrights, and trademarks will be analyzed in terms of creation, maintenance, and instances of violation. The international system for the protection of intellectual property rights will also be studied. The chapter reaffirms the assertion in Chapter 1 that property—the state‘s recognition of a private individual‘s right to exclude others from legitimately acquired resources—is fundamental to the modern private market and is conceptually intertwined with the idea of liberty.
References
Elias, Stephen, Patent, Copyright & Trademark, 3d ed. Nolo.com (1999). Gollin, Michael A., Driving Innovation. Cambridge U. Press (2008). Intellectual Property Stories, Ginsburg & Dreyfuss eds. Foundation Pr. (2005). Johnston, David, et al, Cyber Law. Stoddart (1997). McJohn, Stephen M., Intellectual Property: Examples and Explanation. 6th ed. Wolters Kluwer (2018). 1-168
Merges, Robert P., et al., Intellectual Property in the New Technological Age, 3rd ed. Aspen (2003). Miller, Arthur R. and Michael H. Davis, Intellectual Property in a Nutshell, 6th ed. Thomson West (2018). Poltorak, Alexander, and Paul Lerner, Essentials of Intellectual Property: Law, Economics, and Strategy, 2d ed. Wiley (2011).
Teaching Outline A. The Justification for Intellectual Property (LO 11-1) Emphasize: How an exclusive right to what an individual acquires and produces gives incentive to create new things, new ways of doing things, and new invention generally. That the framers of the U.S. Constitution made sure that Congress could protect intellectual property with Article. 1, Section 8. See Sidebar 11.1 on the increasing importance of intellectual property. See figure 11.1 on the different categories of intellectual property rights. Additional Matters for Discussion: Property is often taught as a ―bundle of rights,‖ such as the rights to possess, use, and transfer (exchange) resources. But, property can also be envisioned primarily as a negative blanket right, the right to exclude others, including the state. As Professor Merrill wrote, ―Give someone the right to exclude others from valued resources… and you give them property. Deny someone the exclusion right and they do not have property.‖ Since the institution of property promotes individual prosperity and permits unequal accumulation of resources, it is easy to see why some students may associate property with greed and materialism. Students may not appreciate that the resources that property protects are usually limited only at a point in time, not over time, and that the function of the private market is to generate new resources, new wealth. B. Intellectual Property and Competition Emphasize: That the basic economic system of intellectual property is grounded in the idea of incentives. That conversely, without intellectual property, the pace of creative research and development (R & D) in business would slow dramatically. That countering the benefits of intellectual property protection are certain costs. 1-169
Sidebar 11.2—―The Open Source Alternative‖
Additional Matter for Discussion: Note the 2005 estimate that 75 percent of the value of the Fortune 500 companies derives from intellectual property, including trade secrets and the value of trained employees. C. Capturing Intellectual Property Emphasize: That the protections of property often do not apply automatically to intangible knowledge resources all information one or one‘s business creates. That the failure to follow the rules may mean that information that could have been captured is instead dedicated to the public domain, meaning that anyone can use it. I. Trade Secrets (LO 11-2) Emphasize: The definition of trade secret. Sidebar 11.3— ―Trade Secrets and International Relations‖ explaining how theft of trade secrets has become part of international trade negotiations. A. Establishing the Existence of a Trade Secret Emphasize: That to protect information as a trade secret, the information must actually be secret, and the business must take reasonable measures to keep it so. The various types of reasonable measures that businesses take. The usefulness of a trade secret audit. Case 11.1—Al Minor & Associates, Inc. v. Martin, 881 N.E.2d 850 (Ohio, 2008) B. Demonstrating Misappropriation Emphasize: The definition of misappropriation. That independent creation does not constitute misappropriation. That a patent may provide better protection for a valuable invention embodied in a product, assuming the stringent requirements can be met. Additional Matters for Discussion: 1-170
Ask the students how the businesses they have worked for have protected trade secrets. Many students will have worked in restaurants that must protect their recipes. How a company should structure a program to protect trade secrets may be found in Bloom & Chard, ―Protection Programs Should Secure More Than Trade Secrets,‖ Nat‘l L.J., 8/30/93, p. 522. Employee Mobility and Trade Secrets Emphasize: That increasingly, employers require employees to sign confidentiality contracts promising not to disclose what they learn in confidence in the workplace.
C. Civil Enforcement of Trade Secrets Emphasize: The definition of injunction. That trade secret owners can also obtain damages against those who misappropriate trade secrets. Additional Matter for Discussion: How the Business Decision Revisited is basically the story of Jose Lopez and his move from GM to Volkswagen. His story may be found in ―GM v. Volkswagen,‖ Newsweek, 12/9/96, p. 48. D. Criminal Enforcement of Trade Secrets Emphasize: The federal Economic Espionage Act. That the Coca-Cola case in Sidebar 11.4 is an example of an Economic Espionage Act criminal prosecution. The two provisions of EEA for misappropriation. The global dimensions of trade secret theft. Sidebar 11.5—―Federal Government Intellectual Property Enforcement‖ Additional Matter for Discussion: Raise the issue of how easy it is to misappropriate digital trade secrets with an iPod and printed and other trade secrets with a cell phone camera. II. Patent Law (LO 11-3)
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A. Obtaining a Patent Emphasize: The existence of the Patent and Trademark Office (PTO). Patent Type Emphasize: The three types of patents—design, utility and plant—and the length of time in obtaining a patent. (See Figure 11.2) The steps in obtaining a patent. The role of the patent examiner. Sidebar 11.6—―Can AI be an Inventor‖ B. Patentable Subject Matter Emphasize: The types of patentable subject matter. The case of Diamond v. Chakrabarty, 447 U.S. 303 (1980). Case 11.2: Alice Corporation Pty. Ltd. v. CLS Bank International, 134 S. Ct. 2347 (2014) Additional Matters for Discussion: A hot topic in patent law continues to involve the business subject matter patent. Dotcoms like eBay whose chief asset may be a business method program that is easily copied continue to sue each other. Historically, business methods were not IP protected. Do the patent battles over business methods enhance or decrease productivity? See Thomas E. Weber, ―Battles over Patents Threaten to Damp Web‘s Innovative Spirit.‖ WSJ, 11/8/99, p. 81. Note that the vigorous enforcement of copyrights and trademarks against documentary film makers raises the same damping issue. Before investing in internet businesses, venture capitalists are carefully scrutinizing business plans and considering how patentable core technologies are. Patentability of technologies and methods become important in Initial Public Offerings. C. Novelty, Nonobviousness, and Utility Emphasize: That the characteristic of novelty indicates that something is new and different from the prior art. That nonobvious refers to the ability of an invention to produce surprising or 1-172
unexpected results; that is, results not anticipated by prior art. That except for patents issued on designs or plants, an invention to be valid must have utility—it must do something useful. Sidebar 11.7—―Is Software Patentable? Maybe.‖
Additional Matter for Discussion: Patent registration is just that: registration. The property is not perfected, however, i.e., does not become legally valid, until adjudged so by a court. Although the validity of patents is often attacked on the basis of subject matter, probably the most common basis of attaching patent validity in court is by arguing that the invention is ―obvious‖ to experts in the area. D. Patent Enforcement Emphasize: The constitutional limitation on patent duration. That when a patent expires, the invention is in the public domain, and others may use it without limitation. That for the duration of a patent, the owner can sue those who infringe on it. If successful, the owner can get an injunction prohibiting future infringement, damages, including triple damages for willful infringement. That simply owning a patent is not a license to produce a product or service. That a single item may have numerous patents held by various different owners. (Refer to Figure 11.3‘s smartphone example.) E. Patent Trolls and the Litigation Threat Emphasize: What a patent troll is. That as a counter to the patent troll rhetoric, one might consider the fact that nonpracticing entities are exercising a legitimate right under their property grant. New cases that may reduce troll behavior. Additional Matters for Discussion: Discuss the implications of the fact that most new drugs are discovered by U.S. pharmaceutical companies. Sidebar 11.8—―Invention Sharing During a Public Emergency‖
III. Trademark Law (LO 11-4) 1-173
Emphasize: That recognizability or distinctiveness is the function of trademarks and why companies want to distinguish their products and services from their competitors‘ products and services. A. Types of Trademarks Emphasize: The four various types of marks and that they are generally called trademarks. That distinctive trademarks are registered under the Lanham Act of 1946. Sidebar 11.9—―Brands vs. Trademarks‖ Trade Dress Emphasize: What a trade dress is. The case of Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763 (1992). B. Trademark Registration Emphasize: When the PTO will deny registration. That every ten years the owner must renew the trademark registration. How secondary meaning can allow the trademarking of a person‘s name. Sidebar 11.10— ―Can You Register an Offensive Mark?‖ C. Trademark Enforcement Emphasize: That civil violation of a trademark (or a patent) is termed infringement. Case 11.3: Kraft Foods Group Brands LLC. v. Cracker Barrel Old Country Store, Inc., 735 F.3d 735 (7th Cir. 2013) The meaning of generic and that if the trademark loses its distinctiveness, it also loses its status as a protected trademark. Table 11.1—―Trademarks Lost Due to Generic Use‖ How defendants can win trademark infringement lawsuits. The concept of fair use. Criminal counterfeiting of trademarks and palm off. 1-174
Sidebar 11.11—―Counterfeiting Has a Global Economic Impact‖
Additional Matters for Discussion: Observe that much intentional trademark violation occurs in international trade and that international conventions (discussed in Chapter 18) are not subscribed to by all countries. Fake ―Rolex‖ watches and counterfeit ―Levi‖ jeans are only the tip of the iceberg. Emphasize that most trademark litigation does not involve intentional infringement and can be regarded as a way of establishing property boundaries. Case for Discussion: 1.
A federal district court judge ruled that Burger King‘s use of ―Kid‘s Meal‖ did not infringe on McDonald‘s trademark ―Big Kid‘s Meal.‖ The court indicated that the term ―kid‘s meal‖ was generic and had long been used in the industry to specify a smaller youth portion.
Trademarks and the Internet Emphasize: The Anticybersquatting Consumer Protection Act of 1999. D. Trademark Dilution Emphasize: The passage of the Federal Trademark Dilution Act, and its key concepts. The passage of the Trademark Dilution Revision Act. IV. Copyright Law (LO 11-5) A. Copyright Ownership Emphasize: The three criteria necessary for copyright protection of a work to occur. That copyright laws protect authors rather than inventors. The length of copyright protection. Sidebar 11.12—―When Is a Uniform Expressive?‖ Sidebar 11.13—―Public Domain Day Finally Arrives‖ B. Copyright Enforcement 1-175
Emphasize: How an author can enforce copyright. That large-scale copyright infringement is often referred to as piracy. Case 11.4: Skidmore v. Led Zeppelin, 952 F.3d 1051 (9th Cir. 2020) C. Copyright Fair Use Emphasize: The meaning of copyright fair use. Additional Matters for Discussion: Sidebar 11.14—―State Governments and Copyright: the Supreme Court Giveth and Taketh Away‖ on the right of a state actor to use copyrighted works. Observe that ―streaming‖ technology has reached levels that enable the ―Napsterization‖ of movies. Note that beginning in 2003 the music industry began filing hundreds of lawsuits against those who illegally file-shared copyrighted music. D. Copyright in the Digital Age Emphasize: The case of Metro-Goldwyn-Mayer Studios v. Grokster, 125 S. Ct. 2764 (2005). That criminal prosecutions and civil lawsuits for ―file sharing‖ copyrighted material over the Internet continue. Additional Matter for Discussion: Discuss how the exclusive right (property) that belongs to a copyright holder includes copying for commercial use. The holder literally has a property in exploiting the market during the copyright period. Because of market-related illegal copying, CD sales have fallen not only in the U.S. but throughout the world. In Germany, CD sales fell by onethird from 1998-2003. Digital Millennium Copyright Act Emphasize: The Digital Millennium Copyright Act (DMCA) makes illegal the effort to get around (circumvent) devices used by copyright owners to keep their works from being infringed. How the Act exempts Internet service providers under certain circumstances. 1-176
Sidebar 11.15—―Knowledge of Users‘ Infringing Activity‖ V. International Intellectual Property Rights (LO 11-6) Emphasize: That there are in fact no fully international intellectual property rights, per se. That there are international standards that most industrialized nations have agreed to uphold. That the most important source for standards is an international treaty known as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). That in the context of patents, there is the Patent Cooperation Treaty (PCT), which allows an applicant to obtain a preliminary international examination and then pursue final rights in multiple countries at the same time. That the most important two organizations are the WTO and the World Intellectual Property Organization (WIPO). VI. A Conclusion about Intellectual Property Emphasize: That intellectual property, like property itself, serves the common good. That the enforcement of intellectual property is something important to all nations that are part of the global trading system.
Answers to Review Questions and Problems 1.
The Justification for Intellectual Property a. b.
2.
The purpose of patents and copyrights is to promote the progress of science and the useful arts (i.e., business). The claim that the pace of research and development of new products would slow if intellectual property right did not protect it recognizes the incentive given by private property to research, invention, and production.
Intellectual Property and Competition a. b.
Exclusion allows a company to focus on R & D knowing that their labors can be protected. The increased R & D allows for innovative competition. Students‘ answers may vary. While profit may be diminished, encouraging open source alternatives for software is one alternative.
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3.
Capturing Intellectual Property Information that is not diligently protected can lose trade secret status. Patents not applied for properly and within established time frames may become part of the public domain. Allowing names of items to become generic can cause a loss of trademark rights.
Trade Secrets 4.
Trade Secret: Taking Reasonable Measures to Keep the Secret a. b.
5.
To maintain a property, the object of the trade secret must be kept secret. Ways of preserving secrets include computer firewalls, the careful regulation of outside visitors, vaults, non-disclosure clauses, and non-compete clauses.
Demonstrating Misappropriation The types of actions that constitute misappropriation under trade secret law includes improperly acquiring secret information through burglary, espionage, computer hacking, or disclosing information one has a duty to keep secret.
6.
Trade Secret: Civil Enforcement The principal remedies are injunction and damages.
7.
Trade Secret: Criminal Enforcement Criminal misappropriation of trade secrets has become an issue of greater concern in recent years likely because digital technology has made it easier to misappropriate secrets.
Patent Law 8.
Obtaining a Patent The applicant must pay a filing fee and file an application. The three different patents have required information that must be included. In the case of a utility patent the application must, in words and drawings, (1) explain how to make and use the basic invention; (2) show why the invention is different from prior art, and (3) precisely detail the subject matter that the inventor regards as the invention (called claims). A patent examiner then reviews the application.
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9.
Patentable Subject Matter The individual cannot patent this knowledge. He or she would have to apply this law of nature in some way in order to get a patent.
10. Nonobviousness, Novelty, and Usefulness a. b.
Since the remedy has been published and is likely to have been put to use more than a year before the filing, the examiner will reject the application. Nonobviousness refers to the production of surprising or unexpected results not anticipated by prior art. The standard is measured against someone with at least an ordinary skill in the prior art.
11. Patent Enforcement Yes. Consider the smartphone example in the text. 12. Current Issues in Patent Law a. b.
These so called patent trolls often make money with minimal contribution to the product. Reforms are being considered to deal with this matter. The 2011 revisions to the Patent Act explicitly preclude patents covering humans, because DNA is a product of nature. If the gene was manipulated in a lab, it is no longer a product of nature and may be patented.
Trademark Law 13. Types of Trademarks Trademarks, service marks, collective marks, and certification marks are often all just called trademarks. 14. Trademark Registration a. b.
Yes, but only if the name is not descriptive of a restaurant business. One cannot register a trademark if it is similar to another established mark, if it contains prohibited, immoral or reserved names or symbols, if it is the likeness of a living person without their consent, or if it merely describes a product or if the mark is generic. The mark must be distinctive and cannot cause confusion.
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15. Trademark Enforcement If the term ―google,‖ rather than being distinctive, came to mean any kind of Internet search, the company Google would lose its famous trademark. 16. Trademark Dilution Students‘ answers might vary. A store was opened with the name, ―Victor‘s Secret‖, selling lingerie and adult novelties. Victoria‘s Secret, a long established lingerie store sued. The name was different so there was no direct infringement of the Victoria‘s Secret trademark but dilution occurred because customers were likely to be confused and might consider the similarity in names to indicate a relationship between the stores and the brand. Copyright Law 17. Copyright Ownership a. b.
No, because to be copyrightable a work must be creative. The company has rights to the work if the employee created the work within the scope of their employment. This is called a work for hire agreement.
18. Copyright Enforcement One could argue that this use constitutes a fair use of the copyrighted material since fair use includes copying for ―criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research.‖ 19. Copyright in the Digital Age The ease of making illegal copies and the difficulties in tracking illegal copying make enforcement difficult. International laws are also not helpful although there are strides being made in this area. 20. Digital Millennium Copyright Act ISPs are only liable if they receive notice from copyright holders asking for removal of material and they fail to comply. The DMCA shields ISPs from initial liability without such notice.
Business Discussion #1 1-180
1.
Can a company have property in its marketing plans the way you can have property in your car? Property is the right to exclude others from the use of something one has a right to. Marketing plans may be considered trade secrets and as such property rights will accrue to them.
2.
Can EMW use Colonial Car’s marketing plans without permission? Since Colonial carefully kept their plans secret and the plans could not have been discovered in a legal manner, EMW will be considered to be misappropriating the plans and can be barred by injunction. Criminal sanctions may also be available. Their defense would be to show that they had themselves created the design prior to the VP switching companies.
Chapter 12 Global Expansion and International Law Learning Objectives
This chapter is intended to provide the student with an introduction to some aspects of the legal environment of international business transactions. In addition, it is designed to provide an understanding of how economically interdependent nations have become in recent years. The chapter also seeks to provide students with a basic understanding of the rules of international law and the major institutions. Some consideration also is given to the emergence of the free trade agreements on the global economy. Finally, the students are exposed to some of the risks involved in international transactions, including the requirements of the Foreign Corrupt Practices Act.
References
August, Ray, International Business Law, 6th ed. Prentice Hall (2012). Aust, Anthony, Handbook of International Law. Cambridge UP (2005). Belous, Richard and Kelly, Global Corporations and Nation-States: Do Companies or Countries Compete? National Planning Assoc. (1991). 1-181
Deming, Stuart H., Foreign Corrupt Practices Act and the New International Norms. ABA (2005). DiMatteo, Larry, et al., International Sales Law: A Critical Analysis of CISG Jurisprudence. Cambridge UP (2014). Folsom, et al., International Business Transactions in a Nutshell, 10th ed. West Publishing Co. (2016). Hirschhorn, Eric, The Export Control Embargo Handbook. Oceana Publications (2005). Joyner, Christopher C., International law in the 21st Century: Rules for Global Governance. Rowman & Littlefield (2005). Low, Lucinda, et al., International Lawyer‘s Deskbook. ABA (2003). Matsushita, Mitsuo, The World Trade Organization: Law, Practice and Policy. Oxford UP (2003). Rochester, J. Martin, Between Peril and Promise: The Politics of International Law. CQ Press (2006). Schaffer, Agusti and Dhooge, International Business Law and Its Environment, 9th ed. Cengage Learning (2014). Vagts et al., Transnational Business Problems, 5th ed. The Foundation Press (2014). Weatherill, Stephen, Cases and Materials on EU Law, 12th ed. Oxford UP (2016).
Teaching Outline
I. Risks Involved in International Trade (LO 12-1) Emphasize: The nine-point bullet list of concerns. Sidebar 12.1—―Pharmaceutical Products to Toys: Issues Related to Sourcing‖ A. Pressures for Bribes Emphasize: The Foreign Corrupt Practices Act (FCPA) and its two principal requirements. That as a result of intensive lobbying by the U.S. business community, Congress amended the FCPA in 1988 in an effort to eliminate ambiguity and uncertainty over what constitutes improper conduct. Since 2009, FCPA enforcement has increased substantially. Table 12.1—―FCPA: Legal or Permissible Payments.‖ Discuss why companies might want to make any payments, legal or not. That criminal penalties may be imposed for violations of the FCPA. 1-182
Sidebar 12.2—―Turning Back the Tide of Corruption.‖
Additional Matters for Discussion: Consider that bribery has been a way of life for centuries in many foreign countries. Should the United States impose ethical standards on other cultures? The developing practice of using offsets to bypass domestic bribery laws. Sidebar 12.3—―FCPA Prosecutions: U.S. Government Success Stories‖ B. Money Laundering Emphasize: That money laundering is a generic term for taking the proceeds of criminal activity and making them appear legal. There is an increasing level of sophistication associated with trade-based money laundering. The Money Laundering and Asset Recovery Section of the U.S. Department of Justice leads the government‘s asset forfeiture and anti-money laundering efforts. C. Expropriation and Nationalization Emphasize: That if a domestic firm is involved in a foreign country to the extent of locating assets there, it may be subject to the ultimate legal and political risk of international business activity—expropriation. That the U.S. Constitution prohibits the government from seizing private property except for ―public purposes‖ and upon the payment of ―just compensation.‖ Compare the extent of such protection elsewhere. Additional Matters for Discussion: Discuss the importance of providing adequate compensation to ensure economic development. Risk generally: see Sidebar 12.1 and discuss Mattel‘s massive toy recall. D. Export Controls Emphasize: That a risk involved in doing business abroad is export controls placed on the sale of U.S. strategic products and technology abroad. That significant criminal and administrative sanctions may be imposed upon corporations and individuals convicted of violating the law. 1-183
The elimination of COCOM in 1994 and the development of the Wassenaar Arrangement. Consider Cuba as a case example and discuss whether the U.S. should lift its trade embargo with Cuba. Sidebar 12.4—―U.S. Export Enforcement and Economic Espionage: Sample of Major Cases‖
Cases for Discussion: 1.
United States v. Randy Reyes, 270 F.3d 1158 (7th Cir. 2001). The defendant, Randy Reyes, was employed by Siraj International. He made contact with a customer named Texam Holding located in Geneva. Texam was acting as a front for Iran‘s procurement of military aircraft parts from the United States. Reyes was charged with violating the AECA and IEEPA by exporting Munitions List aircraft parts from the United States to Iran without obtaining necessary government licenses. Issue: Was the evidence sufficient to demonstrate a willful violation of the export control statutes and regulations? Held: Yes. Reasons: (1.) The prosecution presented sufficient evidence to show that Reyes was aware of his legal duty not to export Munitions List articles to Iran or any foreign country without a proper license. (2.) Tape-recorded phone conversations demonstrate that Reyes knew both of the illegality of shipping to Iran without a license and that Texam was shipping the parts it ordered to Iran. (3.) Reyes‘ disregard for a known legal duty provided more than sufficient grounds for the jury‘s conviction.
2.
United States v. Covarrubias, 94 F.3d 172 (5th Cir. 1996). Covarrubias was pulled over by a Texas police officer within several miles of the U.S.Mexico border for a malfunctioning taillight and failure to display a front license plate. The officer requested and was granted permission to search the vehicle after smelling fresh paint and noticing a gas filler hose protruding from near the left rear tire of the truck. The search disclosed that one of the truck‘s gas tanks contained weapons. Covarrubias was convicted of attempting to export items on the United States Munitions List without obtaining the required export license. The court found that Covarrubias knew that authorization was required before transporting weapons to another country.
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3.
United States v. Lee, 183 F.3rd 1029 (9th Cir. 1999). Following the deaths in Tiananmen Square, the U.S. State Department suspended all licenses and approvals to export defense articles from the United States to China. The defendant was prosecuted for exporting a military item (cutter blade) without disclosing its intended use (developing proximity fuses for use in exploding artillery shells). The defendant challenged the indictment claiming that U.S. export control laws are unconstitutionally vague. The court rejected the challenge finding that a reasonable person of ordinary intelligence can understand what conduct is prohibited. The court found the obligation is on the businesspeople to resolve perceived ambiguities before exporting goods.
II. International Law and Organizations Emphasize: Sidebar 12.5—―Twenty-First-Century Pirates‖ A. Sources of International Law (LO 12-2) Public International Law Emphasize: That the ICJ is the judicial branch of the United Nations and sits at The Hague in the Netherlands. Go to www.icj-cij.org/ for links to current cases and decisions of the court. That the ICJ renders, on average, only one contested decision per year and one advisory opinion every two years. There has been widespread reluctance to resort to the ICJ as a forum for resolving international disputes for several reasons. That private parties or corporations may not directly present claims before the Court. That Article 38 sets forth the order of importance for determining what is the international law in a given case. Private International Law Emphasize: That private international law is represented by the laws of individual nations and the multilateral agreements developed between nations to provide mutual understanding and some degree of continuity to international business transactions. Additional Matters for Discussion: 1-185
Discuss corporate codes of conduct. See Sidebar 12.6. Ask students to consider what they would include in a corporate code of conduct.
Case for Discussion: 1.
Armed terrorists seized a civilian bus in Israel and killed, wounded, and tortured the passengers. The victims were citizens of Israel, the United States, and the Netherlands. An action was brought in the United States against Libya, the Palestine Liberation Organization, and other alleged perpetrators under the American Alien Tort Claims Act. The act permits aliens to bring tort actions committed in violation of the law of nations. Issue: Is terrorism a violation of the law of nations? Held: No. While this nation condemns all terrorist attacks, that sentiment is not universal. Terrorism has evoked strident reactions and sparked strong alliances among individual states. The law of nations is defined as the principles and rules that states feel bound to observe and do commonly observe.
B. International Organizations Emphasize: The eight UN Millennium Development Goals referenced in the marginalia. United Nations Emphasize: The primary goal that the Charter of the United Nations sets forth. The importance of the Security Council and the veto power of the five permanent members. Discuss whether the composition of the Security Council should be changed to reflect current political and economic realities. That a number of organizations affiliated with the U.N. have authority over activities that directly affect international business. The purposes of the International Monetary Fund (IMF) and the World Bank. Additional Matter for Discussion: The successes and failures of the U.N. to bring about a peaceful world. Consider the cases of Iraq and Bosnia. World Trade Organization
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Emphasize: The role of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). Discuss the goals and purpose of the WTO. Is it working as planned? What will be the future role of the United States in the organization? The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), including trade in counterfeit goods. Additional Matter for Discussion: The status of the conflict between the United States and other nations over imports and exports and the role of the WTO in resolving trade disputes. Consider the steel tariffs imposed by President Bush. The WTO has ruled that such tariffs are illegal and will combat the tariffs with more than $2 billion of sanctions on other U.S. exports. Many U.S. companies are also decrying their own country‘s tariffs and their profit-cutting effects. The European Union Emphasize: That in 1957, six European countries, Belgium, France, Germany, Luxembourg, and the Netherlands signed the Treaty of Rome, creating the European Community. See Table 12.2 for a complete list of states, accession dates, and those countries using the euro as legal tender. The EU‘s mission in the twenty-first century. The major institutions of the EU. Go to the EU website—Europa.eu/—for current news. Brexit, and its impact on the United Kingdom and the EU. Additional Matters for Discussion: Consider the potential conflict between foreign business practices and the European laws as exemplified by the conflict between Euro Disney and French labor law over Disney‘s strict dress code. A lawsuit in France claimed that Disney‘s ban of mustaches, beards, and excessive jewelry violates the law since it was not approved by both workers and managers meeting as a work council. Discuss the difficulties of bringing Eastern European countries into the EU given the vast differences in wealth between Western and Eastern Europe. Note how the elaborate European welfare system is being strained by the demographic changes throughout Europe where people are living longer and having fewer children. Discuss the growing tensions between the United States and the EU over a variety of trade disputes including tariffs, agriculture subsidies, and genetically modified foods. 1-187
Case for Discussion: 1.
Verband Sozialer Wettbewerb eV v. Clinique Laboratories and Estee Lauder Cosmetics GmbH, Case C-315/92 European Court of Justice (1994). Germany banned the sale of the product ―Clinique.‖ Germany claimed that the similarity in sound between the words ―Clinique‖ and ―Klinik‖ would confuse consumers. The former is the name of the cosmetic product and the latter means a hospital. The Court held that the problem with the argument is that the products in question are sold in perfumery departments where confusion should be minimal. The objective of a free and open market is compromised by Germany‘s position. Changing the name of the product is unnecessary to protect consumers and public health. The EU is interested in opening trade with member countries.
C. Major Agreements Affecting Trade (LO 12-3) Convention on the International Sale of Goods Emphasize: The major provisions of the CISG. Additional Matter for Discussion: Review how the problems with the Mexican economy have affected trade between the United States and Mexico. North American Free Trade Agreement Emphasize: In 2019, NAFTA was revised and updated and is now known as the United StatesMexico-Canada Agreement (USMCA) The similarity and differences between NAFTA and the EU. The likely expansion of NAFTA to include additional countries. Sidebar 12.7—―Key Achievements of the U.S-Mexico-Canada Agreement‖ Additional Matter for Discussion: Discuss whether NAFTA and the USMCA have provided mutual benefit to both the United States and Canada. Central America-Dominican Republic Free Trade Agreement 1-188
Emphasize: The advantages for U.S. businesses. Other Important Trade Agreements Emphasize: That the United States ratified trade agreements with South Korea, Panama, and Colombia in 2011. That negotiations are under way for the Transatlantic Trade and Investment Partnership. That the United States was in the process of negotiating the Trans-Pacific Partnership Agreement with 11 nations, but pulled out in 2017.
III. Methods of Transacting International Business (LO 12-4)
A. Foreign Sales Emphasize: That the most common approach for a manufacturer to use when trying to enter foreign markets is to sell goods directly to buyers located in other countries. Ask the students to identify factors which will affect the choice in addition to the considerations involved in domestic choice-of-entity decisions. That international sales involve many risky legal issues. That commonly, an irrevocable letter of credit is used to ensure payment. That the buyer obtains a commitment from the bank to advance (pay) a specified amount (i.e., the price of the goods) upon receipt, from the carrier, of a bill of lading, stating that the goods have been shipped. Sidebar 12.8—―Philip Morris: Restrictions Affecting Their Global Business‖ Cases for Discussion: 1.
Moog World Trade Corporation v. Bancomer, S.A., 90 F. 3d 1382 (8th Cir. 1996). Moog was the beneficiary of an irrevocable letter of credit issues by Bancomer, a Mexican bank, on behalf of its local customer CRG. A dispute arose between Moog and the confirming bank, Boatman‘s Bank of St. Louis, and Bancomer over whether Moog had submitted the proper documents needed for honoring the letter of credit. Moog filed suit in the Unites States against both banks, but the court ruled that Moog could not 1-189
bring a claim against Bancomer due to lack of personal jurisdiction. The court found that Bancomer‘s contact in the United States was insufficient to meet the requirements of personal jurisdiction. 2.
3COM Corporation v. Banco do Brasil, 171 F. 3d 739 (1999). A dispute arose over whether Banco do Brasil had provided effective notice of nonrenewal of a letter of credit in favor of 3COM. Banco contended that it had cancelled the letter of credit and 3COM maintained that the credit was not cancelled. The court ruled that Banco do Brasil had not cancelled the letter of credit. It found that Banco‘s notice of non-renewal was neither clear nor unequivocal. Simplicity and certainty are the hallmarks of the letter of credit transaction according to the court.
B. Licenses or Franchises Emphasize: That a licensing arrangement allows the international business to enter a foreign market without any direct foreign investment. That licensing often is used as a transitional technique for firms expanding international operations since the risks are greater than with foreign sales but considerably less than with direct foreign investment. Sidebar 12.9—―Successful International Franchising Ventures‖ Additional Matters for Discussion: The inherent difficulty of protecting intangible property rights such as patents, copyrights, trademarks, or manufacturing processes, are transferred in exchange for royalties in the foreign country. The problems of cultural differences affecting the successful operation of an overseas franchise such as McDonald‘s in France. See Raymond Dayan v. McDonald’s Corp., 125 Ill.App.3d 972, 466 N.E.2d 958 (1984). C. Direct Foreign Investment Emphasize: That the creation of a foreign subsidiary may pose considerable risk to the domestic parent firm by subjecting it to foreign laws and the jurisdiction of foreign courts. Union Carbide's subsidiary in India which operated the plant in Bhopal would be an excellent illustration for generating discussion on this topic. This case also illustrates a number of other issues, including conflicts of law and enforceability of foreign judgments. In Re Union Carbide Corp. Gray Plant Disaster at Bhopal, 809 F.2d 195 (2d Cir. 1987). 1-190
That in many instances the only legal or political means a firm has to invest directly in a foreign country is to engage in a joint venture with an entity from that host country.
Additional Matters for Discussion: Many countries that are rich in natural resources and plentiful in labor may be lacking in roads, bridges, public utilities, drinking water, and education. Dating back to their experiences with Western colonization, many countries may be very sensitive to business arrangements from the United States. Consider various means that can be used to avoid claims of unfair business practices. Sidebar 12.10—―Chiquita Brands International: Payment to Death Squads for ‗Protection‘‖ IV. Resolving International Disputes (LO 12-5) A. Alien Tort Statute Emphasize: That the Alien Tort Statute (ATS), enacted in 1789, grants jurisdiction to U.S. federal district courts over ―any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.‖ That in the last 20 years, the ATS has been revived in a number of human rights contexts, including claims brought against U.S. global companies. An essential aspect of a successful claim under the ATS is to demonstrate that the acts committed violate the law of nations. Case 12.1: Kiobel v. Royal Dutch Petroleum, Co., 569 U.S. (2013) B. Suing Foreign Governments in the United States Emphasize: The Foreign Sovereign Immunities Act (FSIA). The commercial acts exception. Cases for Discussion: 1.
Transamerican Steamship Corp. v. Somali Democratic Republic, 767 F.2d 998 (D.C. Cir. 1985) An American shipper, Transamerican Steamship, brought suit against the Somali Democratic Republic for losses when the government detained its ship over a dispute involving the emergency shipment of 40,000 tons of corn. The shipment was part of a 1-191
$20 million famine relief program to ameliorate widespread starvation and malnutrition in Somalia. Issue: Does the district court have jurisdiction over Transamerican‘s claims against Somalia? Held: Yes. The Foreign Sovereign Immunities Act grants foreign sovereigns immunity from suit in the United States unless one of the specified statutory exceptions applies. One of those exceptions is to hear claims arising from the commercial conduct of foreign sovereigns. A foreign state may not invoke sovereign immunity in any case in which the foreign state has implicitly or explicitly waived its immunity or where the claim arises from commercial activities by the foreign state. 2.
Princz v. Federal Republic of Germany, 26 F.3d 1166 (D.C. Cir. 1994) The plaintiff, a Jewish American, brought suit in the United States for injuries he suffered and the slave labor he performed while a prisoner in Nazi concentration camps. The plaintiff was arrested shortly after the United States declared war on Germany while he was living with his family in Slovakia. Rather than being returned to the United States as part of a civilian prisoner exchange then being conducted by the Red Cross, the SS sent the plaintiff and his family to concentration camps because they were Jews. While the plaintiff‘s entire family perished, he was rescued by American soldiers while in a freight car full of concentration camp prisoners. The Court found Germany immune from suit under the FSIA. The FSIA provides that ―a foreign sovereign and its agencies and instrumentalities shall not be immune from the jurisdiction of the courts of the United States or of the States, in any case, in which the action is based upon an act outside the territory of the United States in connection with a commercial activity of the foreign sovereign elsewhere and that act causes a direct effect in the United States.‖
C. Suing Foreign Firms in the United States Emphasize: That to sue a foreign firm in the United States, the Supreme Court held that the plaintiff must establish ―minimum contacts‖ between the foreign defendant and the forum court. The Hague Service Convention that assures defendants sued in foreign jurisdictions will receive actual and timely notice of suit and its requirements when serving the foreign defendant notice of the lawsuit. Sidebar 12.11—―The Reach of U.S. Law: Spector v. Norwegian Cruise Line, Ltd.)‖ Case for Discussion: 1-192
1.
Volkswagenwerk Aktiengesellschaft v. Schlunk, 108 S.Ct. 2104 (1988) A German corporation moved to quash service of a complaint served on its American subsidiary related to a wrongful death products liability action for failure to follow the Hague Service Convention. Issue: Was the plaintiff required to serve the German parent under the Hague Service Convention? Held: No. Where service on a domestic agent is valid and complete under both state law and the due process clause, our inquiry ends.
D. International Arbitration Emphasize: That the advantages of arbitration in domestic transactions are more pronounced in international transactions where differences in languages and legal systems make litigation costs still more costly. That the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention), adopted in more than fifty countries, encourages the use of arbitration in commercial agreements made by companies in the signatory countries. That once the parties to an international transaction agree to arbitrate disputes between them, the U.S. courts are reluctant to disturb that agreement. Sidebar 12.12—―Chevron and Texaco in Ecuador: $18 Billion Judgment‖ Additional Matters for Discussion: An arbitrator‘s decision is more easily enforceable than a court ruling since both parties have agreed in advance to the arbitration. When arbitration clauses are used in international agreements, the parties must decide what group or person they want to control the process. Often the parties use the International Chamber of Commerce, the London Court of International Arbitration, or the American Arbitration Association. China International Economic and Trade Arbitration Commission Emphasize: That the China International Economic and Trade Arbitration Commission (CIETAC) is a permanent arbitration institution established to resolve economic and 1-193
trade disputes arising in China. The World Intellectual Property Organization: Arbitration and Mediation Center Emphasize: The role of the World Intellectual Property Organization (WIPO) Arbitration and Mediation Center.
Answers to Review Questions and Problems
Risks Involved in International Trade
1.
Pressures for Bribes No. It will be difficult for a U.S. court to obtain jurisdiction over the German firm. The FCPA seeks to control bribes by U.S. firms.
2.
Expropriation and Nationalization The ―modern traditional theory‖ requires full compensation to the investor including fair market value as a going concern.
3.
Export Controls a. b.
The future of export controls in doubt because the policy rationale for export controls has been questioned since the end of the Cold War. An inadequate export control regime endangers world peace and national security.
International Law and Organizations
4.
Sources of International Law a.
The ICJ applies international law to resolve disputes between nations. The ICJ resolves international disputes between countries and appearances before the ICJ are voluntary. 1-194
b. 5.
International Organizations a. b. c. d.
6.
The ICJ relies upon Article 38 to determine international law.
The three major principles of the World Trade Organization are nondiscriminatory, national treatment, and elimination of trade barriers. Students‘ answer will vary. These principles will help nations avoid trade wars and lead to free trade. The EU is made up of a Commission, Council of Ministers, Court of Justice, and Parliament. The EU recognizes the importance of an integrated approach to economic development much like the United States.
Major Agreements Affecting Trade a. b.
The CISG is a uniform set of rules intended to eliminate uncertainty in transactions. Tariffs have been reduced and trade has increased as a result of NAFTA & CAFTADR.
Methods of Transacting International Business
7.
Foreign Sales The seller must strictly comply with the terms of the letter of credit to obtain payment.
8.
Licenses or Franchises a. b.
9.
The licensor must restrict the use of the product in technology and take adequate steps to protect confidential information. Licensing can be a less risky approach for the seller in certain situations.
Direct Foreign Investment A joint venture allows local individuals and firms to participate in the benefits of economic growth and decrease the risk of foreign domination of local industry. Of course, the Bhopal disaster demonstrates the dangers of shared ownership.
Resolving International Disputes 1-195
10. Alien Tort Claims Act Yes, because the acts committed by the company violates the law of the nation. 11. Suing Foreign Governments in the United States No. The doctrine of sovereign immunity will prevent the suit in the United States. 12. Suing Foreign Firms in the United States The Hague Service Convention simplifies service abroad and makes it easier for plaintiffs to proceed against foreign defendants. 13. International Arbitration Arbitration clauses simplify the resolution of international disputes and encourage trade by making it easier to resolve disputes between parties in different countries.
Business Discussion #1
1.
Does XYZ have any moral or legal responsibility in this case? Yes, XYZ Company has a moral and legal responsibility to cease doing business with ABC Company.
2.
How should XYZ protect itself under these circumstances? It would be prudent for XYC to inform the U.S. government of what they know about ABC Company and their plans to immediately stop supplies.
3.
Should American business practices be impacted by conflicts between governments? In today‘s world, economic sanctions are often the quickest and most effective method to bring about political change. Businesses have to understand that they play a critical role in carrying out the policies of the U.S. government.
Business Discussion #2
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1.
Should Sophia call the home office to ask for advice? In all likelihood, Sophia feels the pressure to pay the money to further Hello-Hello‘s interests in China. But, hopefully, bells are going off in her head that these payments may be problematic. Payments made to a foreign official may violate the Foreign Corrupt Practices Act (FCPA). Sophia should call the home office for advice. This is the type of decision that should be referred to in house counsel or other corporate counsel for advice.
2.
If her boss says to pay the money, should she do it? Even if her boss says to pay the money, Sophia should be sure that the payments are legal. If the payments are in violation of the FCPA, Sophia could be personally liable and face prosecution.
3.
What potential legal problems are presented by the payments? There are two potential legal problems presented by the facts. The payments made to customs officials may be permissible as facilitating or grease payments, because they are for routine government action. How much money, however, is ―too much‖ under the FCPA for this action? Sophia needs legal advice so that she does not run afoul of federal law. With regard to the $500,000, this large amount is certainly suspicious for some entertaining. More needs to be known about how this money will be used. Any large cash payment to an agent under such pretenses should be avoided. Remind students: violations of the FCPA can result in fines and jail time!
Chapter 13 Criminal Law and Business Learning Objectives
The general purpose of this chapter is to alert students to the importance of criminal law in operating a business. The emphasis is on crimes committed by businesses rather than on business as a victim of criminal conduct. One point of emphasis is the use of criminal law enforcement in response to recent corporate scandals. This chapter also introduces students to the terminology used in criminal law, including basic concepts such as intent. Constitutional protections available 1-197
to those accused of a crime are considered with particular emphasis on unreasonable searches and seizures, self-incrimination, double jeopardy, and trial by jury. The chapter covers specific crimes that are commonly committed in business, especially fraud, conspiracy, and obstruction of justice, as well as other serious crimes such as violations of the Racketeer Influenced and Corrupt Organizations Act. Finally, trends in criminal law are discussed.
References
Abagnale, F.W., The Act of the Steal: How to Protect Yourself and Your Business from Fraud—America‘s #1 Crime. Broadway Books (2001). Anastasi, J., The New Forensics: Investigating Corporate Fraud and the Theft of Intellectual Property. John Wiley & Sons (2003). Biegelman, Martin T., Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance. Wiley (2006). Broadhurst, Roderic and Peter Grabosky, Cyber-Crime: The Challenge in Asia. Hong Kong UP (2005). Coleman, J.W., The Criminal Elite: Understanding White-Collar Crime. Worth Publishers (2002). Collins, Judith M., Preventing Identity Theft in Your Business. Wiley (2005). Green, Stuart P., Lying, Cheating, and Stealing: A Moral Theory of White-Collar Crime. Oxford UP (2006). LaFave, W.R., Hornbook on Criminal Law, 6th ed. West Publishing Co. (2017). Loewy, A.H., Criminal Law in a Nutshell, 6th ed. West Publishing Co. (2020). Rosoff, S.M., H.N. Pontell, and R. Tillman, Profit Without Honor: White-collar Crime and the Looting of America. Prentice Hall (2002). Shover, Neal, Choosing White-Collar Crime. Cambridge UP (2006). Swartz, M. and S. Watkins, Power Failure: The Inside Story of the Collapse of Enron. Doubleday (2003).
Teaching Outline
I. Terms and Procedures A. Classifications of Criminal Conduct (LO 13-1) Emphasize: 1-198
The meaning of the phrase white-collar crime. The difference between a felony and a misdemeanor. How an indictment differs from an information.
Additional Matters for Discussion: Discuss the examples of white-collar crimes in Table 13.1. Discuss the specific settlements listed in Sidebar 13.1—―U.S. Department of Justice: Fraud Prosecutions‖ Emphasize the ramifications of white-collar crime using WorldCom, Inc. as an example. See Sidebar 13.2—―One of the Worst Accounting Scandals of All Time: $11 Billion Accounting Fraud at WorldCom‖ B. Basic Concepts Emphasize: That intent is an important element of many criminal laws. The meaning of the terms willfully and knowingly. The various pleas that can be entered by or on behalf of a criminal defendant. The reasons why the plea of nolo contendere may be so important. C. The Grand Jury Emphasize: The function of the grand jury. The size of grand juries—a federal grand jury must have 16 to 23 citizens (23 on the grand jury, 16 must be present for quorum). Grand jury procedures. A grand jury‘s role is to investigate a broad range of information and decide whether or not a crime has even occurred. The government cannot be required to justify the issuance of a grand jury subpoena by presenting evidence sufficient to establish probable cause because the very purpose of requesting that information is to ascertain whether probable cause exists. Cases for Discussion: 1.
United States v. Williams, 504 U.S. 36 (1992). Williams challenged his indictment by a federal grand jury because the government had failed to present substantial exculpatory evidence to the grand jury. Issue: Can a court dismiss an otherwise valid indictment because the government failed 1-199
to disclose exculpatory evidence in its possession? Held: No. The grand jury is an institution separate from the courts over whose functioning the courts do not preside. Apart from enforcing the most basic constitutional rights and rules prescribed by statute, judges generally don‘t have authority to police prosecutorial misconduct before grand juries. Grand juries are independent of the judiciary. 2.
United States v. R. Enterprises, Inc., 111 S.Ct. 722 (1991). A grand jury issued subpoenas to three companies wholly owned by Martin Rothstein, seeking a variety of books, records, and videotapes. All three firms moved to quash the subpoenas claiming that the materials sought were irrelevant to the grand jury‘s investigation. Issue: Do the strict standards that apply to trial subpoenas apply equally in the grand jury context? Held: No. The government should not be required to explain too much detail behind a grand jury subpoena because that could compromise the secrecy of the proceedings. The law presumes, absent a strong showing to the contrary, that a grand jury acts within the legitimate scope of its authority.
II. Constitutional Issues (LO 13-2) A. The Fourth Amendment: Illegal Search and Seizure Emphasize: That the Fourth Amendment protects individuals and corporations from unreasonable searches and seizures by the government. The application of a search warrant. That to protect police officers, courts have held that officers making an arrest do not need a search warrant to search that person and the immediate area around that person for weapons. That Fourth Amendment protection also extends to certain civil matters. Sidebar 13.3—―The Fourth Amendment: Exigent Circumstances and Identification Checks‖ That today‘s increased security at airports and border crossings does not violate the Fourth Amendment. Case 13.1: Riley v. California 573 U.S. 373 (2014) 1-200
Cases for Discussion: 1.
City of Indianapolis v. Edmond, 121 S.Ct. 447 (2000). The constitutionality of a highway checkpoint, established by the City of Indianapolis, is challenged on the basis that its primary purpose is the discovery and interdiction of illegal narcotics. Issue: Does a highway checkpoint program, whose primary purpose is to detect criminal wrongdoing, violate the Fourth Amendment guarantee against unreasonable searches and seizures? Held: Yes. There are only limited exceptions to the general rule that a seizure must be accompanied by some measure of individualized suspicion. Because the primary purpose of this program is to uncover criminal activity, it contravenes the Fourth Amendment. When law enforcement authorities pursue general crime controls at checkpoints, stops can only be justified by some measure of individualized suspicion. The constitutionality of checkpoint programs depends on a balancing of competing interests at stake and still may be permissible in exigent circumstances.
2.
Skinner v. Railway Labor Executives’ Association, 109 S.Ct. 1402 (1989). After receiving evidence that alcohol and drug abuse by railroad employees had caused or contributed to train accidents, the Federal Railroad Administration issued safety regulations that required blood and urine testing following train accidents. Issue: Do these regulations violate the Fourth Amendment? Held: No. The Fourth Amendment does not proscribe all searches and seizures, only those that are unreasonable. The permissibility of a particular practice is judged by balancing its intrusion on the individual against its promotion of legitimate governmental interests. The government‘s interest in ensuring the safety of the traveling public plainly justifies the regulation.
3.
Dow Chemical Co. v. United States, 106 S.Ct. 1819 (1986). The EPA conducted an investigation of Dow Chemical Company. After Dow denied the EPA entry to the plant for the purpose of taking photographs of its layout and facility, the EPA contracted with a private company to obtain aerial photographs of Dow‘s 1-201
facility. Issue: Did the EPA violate the Fourth Amendment? Held: No. The warrantless aerial inspection during an investigation for possible Clean Air Act violations was not a ―search‖ subject to the Fourth Amendment. Dow had no reasonable expectation of privacy from aerial inspections. The open areas of an industrial plant are different from a dwelling where occupants have a legitimate expectation of privacy. A manufacturing plant is more like an open field in which an individual may not demand privacy. 4.
Washington v. Chrisman, 102 S.Ct. 812 (1982). A state university police officer and a student went to the latter‘s room after his arrest to secure identification. The officer stood in the open doorway of the room but entered when he observed marijuana seeds and a pipe on a desk inside. The officer seized the seeds and the pipe. Issue: Was there a legal search and seizure? Held: Yes. Evidence could be seized. A police officer has the right to keep close tabs on an arrested person, both to maintain the integrity of the arrest and to ensure his own safety. It is not ―unreasonable‖ under the Fourth Amendment for a police officer, as a matter of routine, to monitor the movements of an arrested person, as his judgment dictates, following the arrest.
B. The Fifth Amendment: Protection against Self-Incrimination Emphasize: That the Fifth Amendment is best known for its protection against compulsory selfincrimination. That the protection against compulsory self-incrimination does not protect a businessperson from having to produce, in court, records prepared in the ordinary course of business. That the only business protected by the Fifth Amendment privilege against compulsory self-incrimination is a sole proprietorship. Sidebar 13.4—―Know Your Miranda Rights‖ Sidebar 13.5—―Fifth Amendment Rights: Mere Silence Does Not Invoke Miranda‖ Case for Discussion: 1-202
1.
In Re Grand Jury Witnesses, 92 F.3d 710 (8th Cir. 1996). A federal grand jury was investigating possible criminal violations of the Clean Water Act and issued subpoenas to corporate officials as part of an ongoing corporate criminal investigation. The officials moved to quash the subpoenas claiming that compliance would compel them to produce incriminating corporate documents. Issue: Can witnesses be compelled to produce collective entity documents in their possession if that act of production might incriminate them? Held: Yes. Because the custodian acts as a representative, the act is deemed one of the corporation and not the individual. Fifth Amendment protection does not turn on whether the subpoena is directed to the collective entity, to a person as the entity‘s document custodian, or to the person individually. The issue is whether the subpoena requires the person to produce corporate records held in a representative capacity. Private papers remain protected by the Fifth Amendment and issues of whether a particular document is a private paper or a corporate document may be submitted to the district court in camera.
C. The Fifth Amendment: Double Jeopardy Emphasize: The protections offered by and limitations associated with the double jeopardy clause. Cases for Discussion: 1.
Selective Service System v. Minnesota Public Interest Research Group, 104 S.Ct. 3348 (1984). An action was brought challenging the constitutionality of a statute that denies federal financial aid to male students who fail to register for the draft. Issue: Does this denial of financial aid violate the protection against self-incrimination? Held: No. The statute does not violate the Fifth Amendment privilege of non-registrants. There is no violation of the Fifth Amendment privilege against self-incrimination.
2.
United States v. Doe, 104 S.Ct. 1237 (1984).
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Doe is the owner of several sole proprietorships. A grand jury, during the course of an investigation of corruption in the awarding of county and municipal contracts, served five subpoenas on the respondent. They sought his business records including telephone calls, bank accounts, and checks. Issue: Are these records protected by the Fifth Amendment? Held: The records are not privileged, but their production is. Where the preparation of business records is voluntary, no compulsion is present. A subpoena that demands production of documents does not compel oral testimony; nor would it ordinarily compel the taxpayer to restate, repeat, or affirm the trust of the contents of the documents sought. The contents are not privileged but the act of producing the document may be. A government subpoena compels the holder of the document to perform an act that may have testimonial aspects and an incriminating effect. Compliance with the subpoena tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer. It also would indicate the taxpayer‘s belief that the papers are those described in the subpoena. D. The Sixth Amendment: Rights in a Criminal Case Emphasize: That the Sixth Amendment, like the Fifth, provides multiple protections in criminal cases. See the six bullet points in the text. That peremptory challenges during voir dire examination cannot be used to deny a defendant a jury of one‘s peers. The right to an attorney exists in any case where incarceration is a possible punishment. The ethical implications of the Department of Justice rule allowing government lawyers to contact company workers in corporate criminal investigations. Additional Matters for Discussion: The difficulties faced by corporate counsel when prosecutors interview middle managers without the knowledge of the corporation‘s legal department. Consider whether non-unanimous verdicts in criminal cases would be appropriate. E. The Eighth Amendment Emphasize: The prohibition against the federal government from imposing excessive bail, excessive fines, and cruel and unusual punishment. The four basic principles used to determine if a punishment should be deemed cruel and 1-204
unusual. Additional Matters for Discussion: The death penalty requirements set out by the Supreme Court.
III. Specific Crimes (LO 13-3) A. Fraud Emphasize: The three elements used to define fraudulent activities that can result in fines and/or imprisonment. Sidebar 13.6—―Madoff‘s Multi-Billion-Dollar Ponzi Scheme‖ Additional Matters for Discussion: Sidebar 13.7—―FBI Report: Common Fraud Schemes‖ Sidebar 13.8—―Preventing Identity Theft‖ Mail and Wire Fraud Emphasize: That various provisions of the U.S. Code make it illegal to use either the U.S. Postal Service or electronic means of interstate communication to carry out a scheme to defraud. Legal Aspects of Mail and Wire Fraud Emphasize: The legal aspects of mail fraud and wire fraud, including terms such as material fact, intent to defraud, and good faith. That honest services fraud may be brought if one schemes to deprive another of their intangible right to honest services. Case 13-2: Skilling v. United States 130 S.Ct. 2896 (2010) Securities Fraud Emphasize: That securities fraud will be discussed in detail in Chapter 17.
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Health Care Fraud
Emphasize: The six bullet points in the text showing examples of possible fraud in the health care industry. It is estimated that up to ten percent of every dollar spent on health care is due to the existence of fraud. Health care fraud costs an estimated $68 to $230 billion annually in the United States. Discuss the need to more closely monitor health care professionals, hospitals, and nursing homes to prevent overcharging and other forms of fraud. That health care fraud investigations are aided by information revealed by ―whistleblower‖ suits brought under the False Claims Act. Sidebar 13.9—―False Claims Act and Whistleblower Lawsuits‖ Counterfeiting Emphasize: That the use of an unauthorized access device, such as a lost, stolen, expired, revoked, canceled, or fraudulently obtained bank card, is prohibited. Bankruptcy Fraud Emphasize: That to protect the interests of all parties to the proceedings, the U.S. Code makes certain conduct by the debtor and certain conduct by creditors and others a federal crime, which are bankruptcy crimes. That the offense of concealment is a continuing one. Hence, the acts of concealment may have begun before as well as be committed after the bankruptcy proceeding began. Additional Matter for Discussion: The common practice of transferring property to relatives when bankruptcy becomes a real possibility. Consider the legal and ethical implications of such an action. B. Conspiracy Emphasize: The four points that the evidence must show beyond a reasonable doubt to convict a person of a conspiracy. The use of this theory to implicate persons who did not actually participate in the 1-206
crime. Additional Matters for Discussion: The importance of disassociating oneself from the conspiracy immediately upon discovery of the illegal scheme. Sidebar 13.10—―Anatomy of a Prosecution: The Fall of Enron‖ Additional Case for Discussion: 1.
United States v. Shabani, 115 S.Ct. 382 (1994). Shabani was convicted of conspiracy to distribute cocaine even though the trial court refused to instruct the jury that proof of an overt act in furtherance of a narcotics conspiracy is required. Issue: Do the drug conspiracy laws require proof of the commission of any overt acts in furtherance of the conspiracy? Held: No. While the law does not punish criminal thoughts, the criminal agreement itself is the actus reus.
C. Obstruction of Justice Emphasize The broad application of the phrase obstruction of justice. The text of Section 1505 of Title 18 of the U.S. Code in the text. Sidebar 13.11—―Think Before You Act: Examples of Obstruction of Justice‖ Additional Matters for Discussion: The Business Discussion at the end of this chapter provides a possible example of obstruction of justice. The trials of Frank Quattrone and Martha Stewart; the prosecution of ―Scooter‖ Libby. D. False Statement to a Bank Emphasize: The reasons that such conduct is a crime. That it is a federal crime for anyone willfully to make a false statement to a federally insured financial institution. That the purpose behind making such falsehoods a crime is to protect banks and attempt 1-207
to ensure the accuracy of financial information. Additional Matters for Discussion: A company with a large loan from a national bank submits financial statements to the bank every six months. The last three balance sheets show exactly the same cash in the bank and net worth. Has a crime been committed? E. False Statement to a Federal Agency Emphasize: That a businessperson may violate this law by making a false statement to another firm or person with knowledge that the information will be submitted to a government agency. That the Supreme Court has rejected the exculpatory no defense. Sidebar 13.12—―Massey Energy Co. Explosion: Multiple Charges‖ Case for Discussion: 1.
United States v. Yermian, 104 S.Ct. 2936 (1984). Yermian was employed by a private firm that was working on a defense contract for the U.S. government. When he was asked to complete a security questionnaire, he failed to disclose that he had been convicted of mail fraud and made misrepresentations about other employment as well. Issue: Must the government prove that the defendant had actual knowledge that his false statements were being submitted to a federal agency. Held: No. The statute requires only that Yermian knowingly and willfully make false, fictitious or fraudulent statements. The fact that Yermian did not know his false statements would be sent to the Defense Department is no defense.
F. Larceny Emphasize: The definition of larceny as it relates to the concepts of property. The distinction between burglary and robbery. Additional Matters for Discussion: The fact that concepts of larceny by employees takes many forms. 1-208
The examples of CEOs accused of larceny through the trials of Dennis Kozlowski of Tyco and Richard Scrushy of HealthSouth.
G. Racketeer Influenced and Corrupt Organizations Act (RICO) Emphasize: The broad application of RICO. That a person in a private civil action found to have violated RICO is liable for treble, triple damages as well as for costs and attorney‘s fees. Table 13.2 with examples of racketeering activities. Additional Matters for Discussion: Sidebar 13.13—―Major RICO Prosecutions‖ Typical RICO cases: o Ratepayers sue public utilities alleging fraud in ratemaking proceedings. o Suits by the government to rid the unions of corrupt officials. o Criminal charges against brokers for rigged trades on the Chicago Board of Trade. o Employers suing unions and vice-versa, usually alleging extortion. o Customers suing stock brokers for fraud. o Clients and creditors of debtors suing accountants for defective audits and errors in financial statements. Case for Discussion: 1.
H.J. Inc. v. Northwestern Bell Telephone Company, 109 S.Ct. 2893 (1989). A class action suit, with H.J. Inc. as the plaintiff, sought an injunction and triple damages in a RICO suit against Northwestern Bell. The basis for the RICO claims arises from employees of Northwestern Bell bribing members of the Minnesota Public Utilities Commission related to the rates that Northwestern Bell charges. The trial court dismissed this suit since it concluded there was no pattern of wrongdoing. The appellate court affirmed. H.J. Inc. received certiorari from the Supreme Court. Issue: Does RICO require distinct actions of illegality to find a pattern of racketeering? Held: No, for the following reasons: A pattern is found in establishing a relationship among the illegal acts (predicates) and the threat of continuing illegal activity; The evidence presented in this case shows numerous bribes being paid over a 6year period; and 1-209
These multiple examples of predicates and the likelihood the bribes would continue satisfy the requirements of a RICO claim.
H. Cyber Crime Emphasize: The use of the internet as a means for criminal activities. Sidebar 13.14—―HACKED! The Increasing Problem of Cyber Crime‖ The difficulty of investigating and proving cyber crimes. Additional Matter for Discussion: The efforts of companies (especially Microsoft) to have those responsible for creating and spreading computer viruses prosecuted for engaging in criminal behavior. I. Endangering Workers Emphasize: That corporate officials have a duty to protect workers. Breach of this duty may be a crime. That the Occupational Safety and Health Administration (OSHA) can also bring actions against businesses for violation of health and safety standards. Additional Matter for Discussion: Some states have adopted a corporate criminal liability act. Under it, companies and managers can be found guilty of a crime if they fail to notify regulators about safety defects in their products. The law also requires notice to workers of any life threatening hazards in the workplace. Is a swimming pool such a hazard? J. Aiding and Abetting Emphasize: The ease at which a person may be charged with this crime. That to avoid going to trial, many will agree to testify against those more directly involved in return for lesser punishment or even immunity from prosecution. The similarity between aiding and abetting and a conspiracy. The difference between an accessory before the crime and an accessory after the fact. Additional Matter for Discussion: A and B were out drinking together. A asked B to drive him home. B was legally drunk and was arrested for drunken driving. A was also convicted for aiding and abetting B to 1-210
drive under the influence. Ask the students if they agree with this conviction. K. Bribery and Kickbacks Emphasize: The elements of bribery. That bribery is illegal in both domestic and international contexts. (Refer to the Foreign Corrupt Practices Act in Chapter 12 regarding international liability.) That bribery of a public official is illegal under federal law, 18 U.S.C. Section 201. Sidebar 13.15— ―Bribery Prosecutions‖ on high profile bribery cases. L. Sentencing Guidelines Emphasize: The reasons the guidelines were developed. That the guidelines were the subject of much study, debate, and controversy. That federal judges are now free to decide for themselves if the defendants deserve sentences longer or shorter than the ranges in the guidelines. That in accordance with a U.S. Supreme Court decision, the guidelines are now advisory, requiring a court to consider the guideline ranges, but permitting it to tailor the sentence in light of other concerns. Why the sentencing commission has developed special guidelines for sentencing organizations convicted of federal crimes and the type of penalties that the focus is on. Additional Matters for Discussion: The special guidelines for sentencing business organizations. Illustrate how the grid system operates in a specific case. Case for Discussion: 1.
United States v. Nesenblatt, 171 F.3d 1227 (9th Cir. 1999). The defendant appeals the district court‘s four-level enhancement of his sentence for deriving more than one million dollars in gross receipts from his offense. Issue: Did the district court properly apply the U.S. Sentencing Guidelines? Held: Yes, because (1.) The district court understood and applied the Sentencing Guidelines according to the law; (2.) There is ample evidence in the record to support the district court‘s findings under the Sentencing Guidelines; and (3.) In light of the 1-211
available evidence, it was not clear error for the district court to reach its decision in this case. M. Trends (LO 13-4) Emphasize: One of the more significant trends is an increase in prosecution of white-collar criminals and legislative efforts to protect the public from fraud. Additional Matter for Discussion: Recent examples of plea bargaining, convictions, and sentences that are in the media at the time this material is covered.
Answers to Review Questions and Problems
Terms and Procedures 1.
Classifications of Criminal Conduct a.
b.
2.
Businesspeople may be the victims of a variety of crimes. Equally possible, many business activities may lead to criminal behavior if those engaged in such activities are not well aware of the consequences of these actions. Felonies are punishable by fine or imprisonment for a period of one year or more, whereas misdemeanors are punishable by a fine or jail sentence of less than a year.
Basic Concepts In criminal cases, a representative of the United States (called a U.S. Attorney) or of a state (called a state‘s attorney or district attorney) prosecutes a charge against an individual or organization, as a defendant.
3.
The Grand Jury The second juror is more accurate. The grand jury provides a vehicle for investigating possible criminal activity, and its conclusion is simply whether or not there is sufficient evidence to charge the defendant with a crime.
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4.
The Fourth Amendment: Illegal Search and Seizure No. This warrantless search and seizure of stolen parts was not unconstitutional because Burger did not have an expectation of privacy and freedom from these administrative searches. New York v. Burger, 107 S.Ct. 2636 (1987).
5.
The Fifth Amendment: Protection against Self-Incrimination a.
b.
c.
6.
Yes, Roberts must deliver the records. The records are not privileged, but their production is. An individual may not assert the Fifth Amendment privilege on behalf of a corporation, partnership, or other collective entity. A subpoena that demands production of documents does not compel oral testimony; nor would it ordinarily compel the taxpayer to restate, repeat, or affirm the truth of the contents of the documents sought. The contents are not privileged. Although the contents of a document may not be privileged, the act of producing the document may be. A government subpoena compels the holder of the document to perform an act that may have testimonial aspects and an incriminating effect. Compliance with the subpoena tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer. No, Roberts cannot avoid subpoena if he takes steps to dissolve the corporation. The protection against compulsory self-incrimination does not apply to corporations, including professional corporations and partnerships. These collective entities have no Fifth Amendment right to refuse to submit their books and records in response to a subpoena. The only business protected by the Fifth Amendment privilege against compulsory self-incrimination is a sole proprietorship. A closely held corporation with only one shareholder is not protected.
Fifth Amendment: Double Jeopardy No. The protection against double jeopardy is limited to criminal activities. Civil sanctions normally are not considered to be so severe as to be criminal. Hudson v. United States 131 S. Ct. 345, 178 L. Ed. 2d 224 (2010) [2010 BL 236201]
7.
The Sixth Amendment: Rights in a Criminal Case The Sixth Amendment protects individuals by providing for a speedy and public trial, a trial by jury, information related to the pending charges, the opportunity to confront the accuser, the right to subpoena witnesses, and the assistance of an attorney.
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8.
The Eighth Amendment The Eighth Amendment of the U.S. Constitution prohibits the federal government from imposing excessive bail, excessive fines, and cruel and unusual punishment.
Specific Crimes
9.
Fraud Yes, Al used an unauthorized access device (her ATM card) to steal $2,500 from Mary‘s account.
10. Conspiracy Yes. The agreement to participate in wrongful activities can constitute the crime of conspiracy. A person does not need to know all of the details. Anyone not wishing to be part of the conspiracy needs to disassociate him or herself from the process immediately upon discovering the illegal scheme. Mary and Jon did not withdraw immediately. 11. Obstruction of Justice These actions, sending the e-mail and destroying the relevant e-mail message, may be actions that obstruct the grand jury‘s investigation. Similar situations arose in the conviction of Arthur Andersen and in the trial of Frank Quattrone. 12. False Statement to a Bank The individual has made a false statement to a bank. The auditor is an accessory before the fact. The auditor should have refused to add the account receivable to the financial statement. 13. False Statement to a Federal Agency a.
b.
Adam attempts to squeeze between nondisclosure and full disclosure. Because the questionnaire is not answered with truthful information, Adam could be charged with and convicted of making a false statement to the Department of Defense. No, having knowledge that a false document is going to be submitted to a federal agency is not a requirement of this crime.
14. Larceny
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Both Joe and Harry are stealing money from the ABC Company. 15. Racketeer Influenced and Corrupt Organizations Act (RICO) Yes. The shareholder and the corporation are viewed, in the law, as separate entities. 16. Cyber Crime The complexity of internet transmissions and the ―invisibility‖ of the transmitter contribute to cyber crimes being difficult to prosecute. 17. Endangering Workers Yes. Corporate officials have a duty to make sure that safety standards are met. Failure to do so may be considered negligent homicide if a worker is killed. 18. Aiding and Abetting Yes. Susan was an accomplice or an accessory before the fact to Susan filing a false return with the IRS. 19. Bribery and Kickbacks The pharmaceutical company is performing bribery, which is of criminal behavior. 20. Sentencing Guidelines The sentencing guidelines assign a number to each type of crime and to all attending circumstances including the type of offender involved. The law authorizes judges to depart from the guidelines when they encounter factors not considered by the commission. 21. Trends The application of criminal law has been a strong response to corporate scandals in the early 21st century. Businesses and businesspeople have been subjected to increased media coverage including public displays of arrests and court appearances. The use of plea bargaining with lower-level businesspeople to gain information to use against higher-level executives has become commonplace news items. Large sums for bail have been publicized. Also the government‘s attempts to enforce harsh sentences, including seizure of assets, are frequent occurrences. 1-215
Business Discussion #1
1.
Did you commit a crime when you sold the stock? Perhaps. The utilization of the nonpublic information the individual received from the company‘s president may result in a violation of securities law. These facts become much worse if any means of interstate communications were used when the individual learned that the FDA application would be denied or when the individual contacted a brokerage about selling his or her stock.
2.
Did you commit a crime in your answer to the federal agent? If the individual‘s ―story‖ about the preexisting arrangement to sell his or her shares is false, then the statement is criminal.
3.
Were you part of an illegal conspiracy? The answer to this question depends on whether the individual had agreed with others to defraud by selling stock based on nonpublic information and by lying to federal officials. If there was no such agreement, then no conspiracy likely exists.
Chapter 14 Business Organizations Learning Objectives
This chapter presents the factors to consider when faced with deciding which organizational form is best suited for a particular business activity. Upon completing this chapter, the students should realize that there is no easy answer to the question of which form is the best for all business activities. The students should become familiar with the various business organizations that may be created. Specifically, the three basic organizational forms are presented along with four additional forms, which are essentially hybrids of the basic forms.
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References
Carter, C.B. and J.W. Lorsch, Back to the Drawing Board: Designing Corporate Boards for a Complex World. Harvard Business School Press (2004). Cortenraad, W.H.F.M., The Corporate Paradox: Economic Realities of the Corporate Form of Organization. Kluwer Academic Publishers (2000). Bainbridge, S.M., Agency, Partnerships & LLCs, 3rd ed. Foundation Press. (2019). Hynes, J.D. and Lowenstein, Agency, Partnership, and the LLC in a Nutshell, 7th ed. West Publishing Co. (2020) Marcus, A., Big Winners and Big Losers: The 4 Secrets of Long-Term Business Success and Failure. Pearson Education (2006). Morse, G., Partnership Law, 8th ed. Oxford University Press (2015).
ACTS: Revised Model Business Corporation Act Model Business Corporation Act Revised Model Business Corporation Act Revised Uniform Limited Partnership Act Uniform Limited Liability Company Act Uniform Limited Partnership Act Uniform Partnership Act
Teaching Outline
Introduction A. Forms of Business Organizations (LO 14-1) Emphasize: The meanings of the terms ―closely held‖ and ―publicly held‖ organizations. That there are three basic forms of business organizations: o Sole proprietorship o Partnership o Corporation That this chapter also discusses four hybrid forms that businesses may use: o Limited partnership o S corporation 1-217
o o
Limited liability company Limited liability partnership
Additional Matter for Discussion: Sidebar 14.1—―Possible Forms of Business Organizations‖ Have students distinguish among these organizational forms as a preview to the following material. I. Factors to Consider When Selecting a Business’s Organizational Form A. Creation Emphasize: That the word creation means the legal steps necessary to form a particular business organization. That at times, a businessperson may be concerned with how much it will cost to have each form established. That usually, the cost of creation is not a major factor in considering which form of business organization a person will choose to operate a business. The most significant creation-related issues are how long it will take to create a particular organization and how much paperwork is involved. Additional Matters for Discussion: The relevant costs in one‘s area involved in the legal work related to creating various organizations. At the time that business activities begin, that it is crucial for businesspeople to consider all factors in deciding which organizational form is best for their business activities. B. Continuity Emphasize: That the word continuity becomes associated with the stability or durability of the organization. The meaning of the word dissolution. Additional Matter for Discussion: The impact (or lack of impact) of the dissolution of a business organization on the business activity being conducted by that organization. C. Managerial Control 1-218
Emphasize: That the factor of control concerns who is managing the business organization. That the failure to consider how to overcome disputes involving managerial control can cause business activities to suffer and the organization to fail. D. Liability Emphasize: The question asked in the text at the outset of this section. Why the liability factor is very important and deserves significant consideration. E. Taxation Emphasize: That there are specific advantages to creating the organizational forms that are ―single taxed.‖ That advantages also exist when an organization is subject to the supposed ―double tax.‖ Additional Matter for Discussion: Sidebar 14.2—― U.S. Corporate Taxes are No Longer the Highest in the World‖
II. Selecting the Best Organizational Form (LO 14-2) A. Sole Proprietorships Emphasize: That the proprietor obtains whatever business licenses are necessary and begins operations. That a proprietorship‘s continuity is tied directly to the will of the proprietor. That the sole proprietor is in total control of his or her business‘s goals and operations. That a sole proprietor is personally obligated for the debt of the proprietorship. That a sole proprietorship is not taxed as an organization. All the proprietorship's income subject to taxation is attributed to the proprietor. Additional Matter for Discussion: Ask students to provide examples, out of their own experiences, of businesses conducted as sole proprietorships. 1-219
B. Partnerships Creation Emphasize: That the key to a partnership‘s existence is satisfying the elements of its definition: o Two or more persons o A common interest in business o Sharing profits and losses Additional Matters for Discussion: That partners may be business organizations as well as individuals. Provide examples of partnerships between entities that are not individuals. Sidebar 14.3—―Formation and Naming of a Partnership‖ Continuity Emphasize: That a general partnership is dissolved any time there is a change in the partners. Additional Matter for Discussion: The typical contents of a partnership agreement. Sidebar 14.4—―Anticipating a Partnership Dissolution—Buy and Sell Agreements‖ Managerial Control Emphasize: That in a general partnership, unless the agreement provides to the contrary, each partner has an equal voice in the firm‘s affairs. Liability Emphasize: That all partners in a general partnership have unlimited liability for their organization‘s debts. The impact of the concept of joint and several liability. Taxation
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Emphasize: That partnerships are not taxable organizations and all the organization‘s income is attributed to the owners as personal income. Additional Matter for Discussion: The concept summary on the ―Advantages and Disadvantages of Partnerships.‖ Cases for Discussion: 1.
Truck Ins. Exchange v. Industrial Indem. Co., 688 P.2d 1243 (Mont. 1984) A father and son each owned land and raised seed potatoes. They each used their own equipment. Each raised about the same amount of potatoes, and they were stored together and advertised for sale by Wilbur Kimm and Son. A loss arose. Issue: Are the father and son partners such that they must share this loss? Held: Yes. They were partners and must share the loss. Although the intent of the parties is a major factor, if facts bring arrangement within the definition of a partnership, the parties cannot escape liability incident to that relationship merely by saying that no such relationship exists. If the intended action of the parties creates a partnership in fact, what the parties call their arrangement or intend their arrangement to be is irrelevant. The fact that the father and son split profits in a joint account that contained proceeds from their sale of seed potatoes was prima facie evidence that a partnership existed between father and son.
2.
Volkman v. DP Associates, 268 S.E.2d 265 (N.C. 1980) Volkman contacted David McNamee about obtaining advice on a residential construction project. McNamee informed Volkman that he (McNamee) was going into business with Phillip Carroll. Later Volkman was introduced to Carroll, who responded, ―I am happy we will be working with you.‖ Volkman signed a contract with DP Associates, and he assumed the organization‘s name was taken from the first letter of David McNamee‘s and Phillip Carroll‘s names. In fact, there had been no actual agreement between McNamee and Carroll to go into business together. A dispute arose, and Volkman sued DP Associates as a partnership. Carroll sought to be dismissed from this lawsuit since he was not in business with McNamee. Issue: Should Carroll be estopped from denying his liability as a partner?
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Held: Yes. Carroll is liable as a partner by estoppel. One who represents by words or conduct that he is a partner when he is not or one who consents to such a representation by another is estopped or prevented from denying such an association; that person is liable as a partner to those who relied on such representations. 3.
Martinez v. Koelling, 421 N.W.2d 1 (Neb. 1988) Orel Koelling was a partner in a partnership that employed Martin Martinez. Mr. Martinez died as the result of an accident that occurred in the course of the partnership‘s business. Mrs. Martinez filed suit against Koelling to recover for her husband‘s death. Koelling moved for summary judgment on the grounds that the partnership was the employer and liable, if anyone was. Issue: Should Koelling be dismissed from this litigation? Held: No. Partners are jointly and severally liable for the actions of the partnership. Thus, Koelling, as a partner, was a proper defendant.
4.
Martin v. Barbour, 558 S.W.2d 200 (Mo. 1977) A jury returned a $125,000 verdict for the plaintiff against Drs. Barbour and Egle. The case was based on negligence by Barbour in performing an operation. The defendant Egle did not assist or participate in the surgery and did not treat the plaintiff. However, Egle was a partner in the practice of medicine with Barbour at the time of the surgery. Issue: Can one partner (Egle) be liable for another partner‘s (Barbour‘s) negligence? Held: Yes. Egle is liable. Pursuant to general rules, partners in the practice of medicine are all liable for an injury to a patient resulting from the lack of skill or the negligence, either in omission or commission, of any one of the partners within the scope of their partnership business.
C. Corporations Emphasize: The distinction between domestic, foreign, and alien corporations. Additional Matters for Discussion: The minimum legal requirements in the students‘ state for the contents of the articles of incorporation. 1-222
The steps of preparation, filing, and publication of the articles of incorporation. Creation Emphasize: That a corporation is created by a state issuing a charter upon the application of individuals known as incorporators. Sidebar 14.6—―Why Are So Many Companies Incorporated in Delaware?‖ That in comparison with partnerships, corporations are more costly to form. The costs of incorporation and the annual costs in continuing a corporation‘s operation. Sidebar 14.5—―Steps in Creation of a Corporation‖ Continuity Emphasize: That in contrast to a partnership, a corporation usually is formed to have perpetual existence. Additional Matters for Discussion: That a corporation‘s perpetual existence does not assure the success of that organization‘s business activity over time. Managerial Control Emphasize: That the shareholders elect the members of the board of directors. That these directors set the objectives or goals of the corporation, and they appoint officers. That these officers, such as the president, vice president, secretary, treasurer, are charged with managing the daily operations of the corporation in an attempt to achieve the stated organizational objectives or goals. Publicly Held Corporations Emphasize: That in very large corporations, control by management (a combination of the directors and officers) is maintained with a very small percentage of stock ownership through the use of corporate records and funds to solicit proxies.
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Closely Held Corporations Emphasize: That those who own a majority of a closely held corporation can rule with nearabsolute authority. The rights of the minority interest. Additional Matters for Discussion: The importance of a properly drafted buy and sell agreement in closely held businesses. Note the various techniques for valuing an interest in a business. The role and limitations of a shareholder‘s derivative suit. The purpose of preemptive rights as a means of shareholders maintaining control of their corporation. Liability Emphasize: That when courts find that the corporate organization is being misused, the corporate entity can be disregarded. This has been called piercing the corporate veil. What happens when the veil of protection has been pierced. Case 14.1: Alli v. U.S., 83 Fed. Cl. 250 (2008) Taxation Emphasize: Corporations must pay income taxes on their earnings. Having separate corporate tax rates can lead to advantages for business owners. Avoiding Double Taxation Emphasize: The techniques used to avoid ―double taxation‖ of corporate income. These techniques include: o Payment of reasonable salary o Use of reasonable expense accounts o Borrowing money from shareholders and paying interest o Accumulating income within the corporation by not paying dividends o Utilization of Subchapter S election The concept summary on ―Advantages and Disadvantages of Corporations.‖
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Additional Matters for Discussion: The limitations on the techniques to avoid double taxation.
D. Limited Partnerships (LO 14-3) Emphasize: The distinction between general partners and limited partners. That the attributes of a general partnership and a corporation combine to make the limited partnership an attractive alternative form of business organization. Creation Emphasize: That a limited partnership is created by agreement like a general partnership. That as in the case of a corporation, state law requires that contents of a certificate must be recorded in a public office so that everyone may be fully advised as to the details of the organization. Continuity Emphasize: That the principles guiding partnerships also apply to limited partnerships if there is a change in the general partners. Managerial Control Emphasize: That in a limited partnership, the general partners are in control. Liability Emphasize: That a limited partner‘s liability will not exceed the amount of his or her investments. That under the Revised Uniform Limited Partnership Act (RULPA), a limited partner who participates in the organization‘s management becomes liable as a general partner if a third party had knowledge of the limited partner‘s activities. Sidebar 14.7—―Actions by Limited Partner‖
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E. S Corporations Emphasize: That beginning in 1958, the federal government permitted shareholders of certain corporations to unanimously elect to have their organization treated like a partnership for income tax purposes. That this election is made possible through the language of Subchapter S of the Internal Revenue Code. That shareholders in the S corporation can elect to have their business organization treated, for tax purposes, as if it were a partnership. Additional Matters for Discussion: The limitation of no more than 100 shareholders. Why the S Corporation election may not be beneficial if the profits of the business are not distributed to the shareholders. F. Limited Liability Organizations Emphasize: The recent growth in LLCs due to the 1988 IRS ruling. The use of LLPs by professionals. Creation Emphasize: The following distinctive terminology used with LLCs: o Articles of organization o Organizers Continuity Emphasize: That the owners of LLCs are called members rather than shareholders or partners. The transferability of a member‘s interest is restricted in the fashion of a partner as opposed to the free transferability of a corporate shareholder. Managerial Control Emphasize: That the managerial control of an LLC is vested in its members, unless the articles of 1-226
organization provide for one or more managers. Taxation Emphasize: Sidebar 14.8—―Fiduciary Duties in LLCs‖ Additional Matters for Discussion: Whether the students‘ state has adopted legislation authorizing LLCs and LLPs. Any specific rules related to the students‘ state‘s statute on LLCs and LLPs. Some of the operational aspects of LLCs and LLPs. Non-Profits Emphasize: That the non-profit must return any profits made to the organization to be used for future operations. A non-profit can have paid employees, the payment to whom is considered an expense.
Making the Decision Emphasize: That there usually is no absolutely right answer to the question—which organizational form is best for a particular business‘s operation? That while one of these forms may be best, a careful analysis will consider the various factors discussed in this chapter. Additional Matter for Discussion: That the organizational needs of a business may change during the life of that business. As an overview, see Figure 14.1 Corporate Form Selection Factors.
III. Operating the Organization through Agents (LO 14-4) A. Terminology Emphasize: 1-227
How agency relationships shape business organizations. The basic roles in an agency relationship as they apply to business organizations: principal, agent, third party, and independent contractor. The duties owed that are created by the agency relationship.
Additional Matters for Discussion Figure 14.2— ―Illustration of the agency relationship‖ Contractual Liability from an Agent’s Acts Emphasize: The ways that contractual liability may arise. The different types of authority: actual, implied and apparent. The concept of ratification. Tort Liability from an Agent’s Acts Emphasize: How respondeat superior can create tort liability in a business organization. Shareholders of corporations and members of LLCs are protected from tort liability that exceeds the amount of their investment. Frolic and detour. Criminal Liability Emphasize: Criminal liability may be created for a business entity by the acts of its agents. Additional Matter for Discussion: The ongoing criminal liability of Volkswagen‘s diesel emissions scandal (including the charges brought against former CEO Martin Winterkorn).
B. Trends in Managing the Organization (LO 14-5) Emphasize: The distinction between publicly held and privately held business organizations. That three important trends merit consideration here: o The emergence of the benefit corporation. 1-228
o o
The continued definition of the nature of corporation personhood. Criminal prosecutions for corporate wrongdoing may be declining due to the increased use of ―deferred prosecution agreements‖ (DPAs) by the federal government. Case 14.2: Marchand v. Barnhill 212 A.3d 805 (Del. 2019) on the fiduciary duty owed by executives to shareholders.
Answers to Review Questions and Problems
1.
Forms of Business Organizations a.
The three traditional business organizations are the sole proprietorship, the general partnership, and the corporation. Hybrid forms include the limited partnership, the S corporation, the limited liability company, and the limited liability partnership.
Factors to Consider When Selecting a Business’s Organizational Form 2.
Creation Creation, as a factor, usually relates to the cost of forming a business organization. Typically this cost is not of major importance unless the businesspeople have very little money to begin a business.
3.
Continuity All business owners should take into consideration the relationship between the ownership of a business organization and the business being conducted. Sometimes the owner‘s participation in the business is not essential for success. Under such circumstances, the business activity may not be adversely impacted by a change in the legal existence of a business organization.
4.
Managerial Control Failure to agree on who has what degree of control can result in managerial deadlock, thereby causing the business activities to be interrupted, if not cease.
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5.
Liability The factor of liability is used to describe the degree of personal responsibility an owner has for the debts of the organization. Unlimited liability means an owner is personally obligated to satisfy the debts of the organization. Limited liability means an owner is not obligated beyond the amount that owner invested in the organization.
6.
Taxation Anyone investing in a business organization needs to understand how the organization is or is not taxed and what this means to the likelihood of profits or losses being distributed to the owners.
Selecting the Best Organizational Form 7.
Sole Proprietorships The fundamental limitation to this organization is that there can be only one owner. It can also be more difficult to raise capital.
8.
Partnerships Yes, partners are jointly and severally liable for the debts of the partnership.
9.
Corporations a. b.
Most likely the shareholders control a closely held corporation since these owners are likely to be the directors and officers. Methods of avoiding the double taxation of corporate profits which are distributed to shareholders as dividend include (1) the payment of reasonable salaries, (2) the use of reasonable expense accounts, (3) the capital structure of the corporation can include loans, (4) the accumulation of earnings, and (5) the election under subchapter S of the Internal Revenue Code.
10. Limited Partnerships Yes. A general partner in a limited partnership is personally liable. Therefore Sam can recover from Gary. 11. S Corporations 1-230
a. b.
For tax purposes, the S corporation is treated as a partnership. The shareholders may have to pay taxes on income they did not receive.
12. Limited Liability Organizations One advantage of an LLC as compared to an S corporation is that there is no limit to the number of members in an LLC. Also, its owners have more flexibility than with the S corporation. 13. Non-Profits The non-profit must be approved by the IRS showing that it is created for a specific reason allowed by law. A non-profit must be created for a public purpose and not to personally benefit owners or members. A non-profit must return any profits made to the organization to be used for future operations. 14. Making the Decision a.
b.
c. d. e.
A limited partnership is recommended. Unlimited liability could be restricted to Barbara as a general partner. Meanwhile, Albert is protected by the limited liability of a limited partner. Either a limited partnership, a limited liability company, or a corporation. In the LP, Albert and Barbara could be the general partners, and the other investors will be limited partners. In a limited liability company, they can be manager-members and take in other members for capital contributions with limited control in the operating agreement. With a corporation, the other investors should be sold a nonvoting class of stock. A corporation, S corporation, or limited liability company would allow shareholders or members to enjoy limited liability. A partnership would not have to qualify to do business in all fifty states. A partnership, S corporation, or limited liability company would allow the losses to be deducted by Albert and Barbara from their personal incomes.
Operating the Organization through Agents 14. Terminology a.
The three parties in an agency relationship are the principal, the agent and a third1-231
b.
party. Principals hire agents to do tasks and represent them in transactions. Because the agent is acting on behalf of the principal, the principal becomes liable for the acts of the agent.
15. Contractual Liability from an Agent’s Acts No. Originally Albert had actual authority to collect on behalf of Paulette. Because Theresa was not notified of the change in the agency relationship, Albert still has implied authority to collect the debt. 16.
Tort Liability from an Agent’s Acts The question would be whether respondeat superior applies and addressing whether the employee was in the course and scope of employment. Because this happened and if it during the employee‘s working hours, Tammy will likely win her lawsuit. If the employee was not working at the time, but was a customer, then it would be harder for Tammy to prove that liability.
17.
Criminal Liability (a) There are a variety of ways businesspeople and their organizations can be found criminally responsible, including statutes that make corporations liable for certain acts and using respondeat superior. (b) Organizations are generally punished through fines, but certain statutes make responsible officers/agents liable and can face jailtime.
Trends in Managing the Organization 18. The three important trends that merit consideration here are as follows: (1) the emergence of the benefit corporation; (2) the continued definition of the nature of corporation personhood; (3) criminal prosecutions for corporate wrongdoing may be declining due to the increased use of ―deferred prosecution agreements‖ (DPAs) by the federal government. Students‘ answers for the last question may vary. Some students may believe that these trends reflect an increase in legal risk associated with managing the organization.
Business Discussion #1
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1.
What type of organization is best suited for this business activity? A limited partnership in which an investor can be approached to join the partnership, making the necessary contribution, but limiting their liability.
2.
Who will manage the restaurant during times that you and your co-owners are not present? Designated employees must be authorized to act as the manager during one‘s absence.
3.
What liabilities do you and your co-owners face? The owners will be faced with unlimited personal liability, jointly and severally.
Business Discussion #2
1.
How would your firm conduct business on such a large scale? Additional persons will need to become involved in accomplishing the expanded business activities. The form of this involvement, such as investors, managers, employees, or independent contractors, will depend on the organization selected.
2.
How could you limit potential liability for and by various consultants? An understanding of agency principles and forms of business organizations is essential to reduce liability. Utilizing contact provisions with organizations that limit or reduce liability will be necessary.
3.
Which form of business organization is best suited to meet the needs of your growing firm? The answer to this question is not easy to determine. Considerable information, from a variety of sources, (including accountants, bankers, and insurers) needs to be gathered and analyzed.
Chapter 15 The Regulatory Process 1-233
Learning Objectives The purpose of this chapter is to show students the power of the federal government to regulate business. State and federal regulatory powers will be discussed along with the purposes and functions of administrative agencies. Finally, the court‘s role in reviewing administrative decisions will be examined. Ultimately, students are encouraged to make their own judgments regarding the regulatory process.
References
Aman, A.C., Aman and Mayton‘s Administrative Law, 3rd Edition. West Publishing (2014). Parpworth, N., Constitutional and Administrative Law, 10th Edition. Oxford University Press (2018). Riley, D. and B. Brophy-Baermann, Bureaucracy and the Policy Process: Keeping the Promises. Rowman & Littlefield (2006). Schuck, P., Schuck‘s Foundation of Administrative Law, 2nd Edition. Carolina Press (2012). Stillman, R.J., The American Bureaucracy: The Core of Modern Government. Wadsworth/Thompson Learning (2004). Watry, R.A., Administrative Statutory Interpretation: The Aftermath of Chevron v. Natural Resources Defense Council. LFB Scholarly Publications (2002). http://www.whitehouse.gov/government/independent-agencies.html (for an alphabetical listing of federal administrative agencies)
Teaching Outline
I. Regulatory Process—Administrative Agencies (LO 15-1) Emphasize: What the term administrative agencies means and what it constitutes. That agencies may have quasi-legislative and quasi-judicial powers. Examples of state agencies in your state. Note their functions. A. Reasons for Agencies 1-234
Emphasize: That there are a variety of reasons that agencies are created. Sidebar 15.1—―Major Federal Agencies‖ Providing Specificity Emphasize: That the legislative branches often cannot legislate in sufficient detail to cover all aspects of many problems. That it is impossible for Congress to enact a securities law that covers every possible issue that might arise. Providing Expertise Emphasize: That agencies such as the Federal Reserve Board (FRB), the Nuclear Regulatory Commission (NRC), and the Food and Drug Administration (FDA) are examples of agencies with expertise beyond that of Congress or the executive branch. That administrative agencies often provide needed continuity and consistency in the formulation, application, and enforcement of rules and regulations governing business. Providing Protection Emphasize: That many governmental agencies exist to protect the public, especially from the business community. The various agencies created over the years such as the Environmental Protection Agency (EPA), Securities and Exchange Commission (SEC), and Consumer Product Safety Commission (CPSC). Providing Regulation Explain: That agencies often replace competition with regulation. How regulation is often a substitute for competition. Providing Services
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Emphasize: That many agencies arise simply out of necessity. How Congress relies on regulatory bodies to fulfill legislative mandates. B. Functions of Agencies Emphasize: That agencies have been delegated many of the functions of the three branches of government. The different types of functions that are possessed by administrative agencies. Rule Making Emphasize: That rule making is an agency‘s quasi-legislative power. That rules may apply to general business practices regardless of the industry or to a particular industry only. That agencies may publish guidelines to supplement and explain rules. Figure 15.1—―The Powers of Administrative Agencies‖ Adjudicating Emphasize: That the agency‘s quasi-judicial function applies to the agency‘s right to conduct fact-finding and to apply law to facts. That agencies may issue a cease and desist order to prohibit illegal acts or objectionable behavior under their jurisdiction. That many disputes are settled under consent orders. Advising Emphasize: That agencies provide reports to the president or Congress. That agencies report information to the general public and also publish advisory opinions to aid businesses regarding compliance issues. That advisory opinions are not binding and do not carry the same weight as actual rules. The advisory opinion is a unique device generally not available in the judicial system, as courts deal only with actual cases and controversies. 1-236
Investigating Emphasize: That agencies may independently investigate illegal actions. That agencies may use subpoena powers and require reports, examine witnesses under oath, and/or obtain information from other agencies. C. Organization of Agencies Emphasize: That administrative agencies, boards, or commissions usually have between five to seven members, one of whom is appointed as chair. That no more than a simple majority may belong to a single political party. That federal appointments require Senate approval. That appointees must work exclusively for the agency, board, or commission. That removal is by the president and grounds for removal are: inefficiency, neglect of duties, or malfeasance in office Figure 15.2—―Organizational Chart of Typical Agency, Board, or Commission‖ In General Emphasize: That the chairperson is appointed by the president and is the presiding officer at agency meetings. The importance of the chairperson in comparison to other agencies‘ members. That the secretary keeps meeting minutes and is the legal custodian of the agency records. That the secretary also signs orders and arranges for publication of all agency actions in the Federal Register. That the general counsel is the agency‘s chief legal officer and is usually approved by a Senate vote. That the executive director for administration is the agency‘s chief operating officer. Sidebar 15.2—― Is the Structure of the Consumer Financial Protection Bureau Constitutional?‖
Quasi-Judicial Staff Emphasize: The adjudicative fact-finding functions of administrative law judges of the agency. 1-237
The immunity enjoyed by administrative law judges. The role of the Office of Administrative Hearings in states where it is implemented. Case 15.1: Lucia v. SEC, 585 U.S. , 138 S. Ct. 2044 (2018) Sidebar 15.3—―Procedures Followed in Quasi-Judicial Proceedings‖
D. Influencing Agency Decisions Emphasize: Agencies give public notice of proposed rules and hold public hearings on them. That public hearings allow interested parties to provide input prior to agency votes on proposed rules. That each branch of government does have some element of control over agency actions and decisions. II. Judicial Review of Agency Decisions (LO 15-2) Emphasize: The alternatives are available to a person, business, or industry unhappy with either rules or regulations that have been adopted or with the quasi-judicial decisions. A. Standing to Sue Emphasize: That any party seeking the judicial review of any administrative agency‘s decision must be able to prove standing to sue. Reviewability Emphasize: That the two cases where the Federal Administrative Procedure Act does not provide judicial review include when statutes preclude judicial review or when agency action is committed to agency discretion by law. Aggrieved Party Explain: That a challenger must be an aggrieved party. That generally the plaintiff must have been harmed by an administrative action or decision to have standing. Sidebar 15.4—―Standing to Sue or Who May Challenge an Administrative Policy‖ 1-238
Cases for Discussion: 1.
Members of wildlife conservation and environmental organizations filed a lawsuit against the Secretary of Interior. This suit challenged the Secretary‘s decision that the Endangered Species Act governed the spending of funds within the boundaries of the United States and not the allocation of funds to be spent in foreign nations. The plaintiffs argued that the government must take into consideration the impact on endangered species of the expenditures of funds in foreign nations. The Secretary argued that the plaintiffs lacked standing to sue. Issue: Do these plaintiffs have the standing to challenge the Secretary‘s rule making? Held: No. The plaintiffs failed to demonstrate that they suffered an injury in fact. Even assuming that funded activities abroad threaten certain species, the plaintiff failed to show that one or more of their members would thereby be directly affected apart from the members‘ special interest in the subject. Lujan v. Defenders of Wildlife, 112 S.Ct. 2130 (1992).
2
Physicians brought suit challenging the validity of Medicare regulations under Part B of Medicare, which authorize payment of different amounts for similar services. Issue: Can the courts review this administrative ruling? Held: Yes. Judicial review is not barred. There is a strong presumption that Congress intends judicial review of administrative decisions. The presumption may be overcome by specific language or specific legislative history or by inferences drawn from statutory scheme. Bowen v. Michigan Academy of Family Physicians, 106 S.Ct. 2133 (1986).
B. Review of Rule Making Emphasize: That the rule-making function in the administrative process is essentially legislative in character. The requirements for a rule promulgated by an administrative agency to be as enforceable as a statute enacted by the legislature. That once courts decide that an act of the legislature is constitutional or a rule of an agency is authorized, the courts will not inquire into its wisdom or effectiveness.
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Is Delegation Valid? Emphasize: The two constitutional limitations to the delegation of quasi-legislative authority to administrative agencies. That delegation of discretion is to the agency and not to the judiciary. Sidebar 15.5—―Standard of Review of Agency Actions‖ Authority Exceeded? Emphasize: That courts do find that agencies exceed their authority. How the rules of administrative law assist in reaching a decision. The policy of courts to defer to the political process in giving sufficient weight to the administrative decision-making process. Case 15.2: Food and Drug Administration v. Brown & Williamson Tobacco Corporation 120 S. Ct. 1291 (2000) Cases for Discussion: 1.
The National Credit Union Administration (NCUA) approved amendments to the charter of AT&T Family Federal Credit Union. These changes allowed members of this credit union to be employees of a variety of companies. First National Bank & Trust Co. and other banks challenged NCUA‘s approval of these charter amendments. Issues: (1) Did the banks have standing to challenge NCUA‘s actions? (2) Did NCUA‘s actions exceed its authority? Held: Yes to both. Competitors of financial institutions have sufficient interest in NCUA actions relaxing statutory restrictions on activities of such institutions. The Court found that Congress requires some common bond of occupation to unite credit union members. Thus, the NCUA exceeded its authority to relax such requirements. National Credit Union Administration v. First National Bank & Trust Co., 118 S.Ct. 927 (1998).
2.
NationsBank sought permission from the Comptroller of the Currency to sell annuities. When this permission was granted as ―incidental to the business of banking,‖ Variable Annuity Life Insurance Co. (VALIC) filed suit challenging the Comptroller‘s decision. The District Court upheld the Comptroller‘s ruling, but the Fifth Circuit Court of Appeals reversed. 1-240
Issue: Did the Comptroller act within his authority in deciding that banks are authorized to sell annuities? Held: Yes. If a statute is silent or ambiguous with respect to the interpretation being reviewed, the court must defer to the administrator‘s reasonable judgment. The Comptroller‘s conclusion that the sale of annuities is an ―incidental power necessary to carry on the business of banking‖ is reasonable and entitled to the Court‘s deference. NationsBank of North Carolina, N.A. v. Variable Annuity Life Insurance Company, 115 S.Ct. 810 (1995). 3.
The FCC, relying on statutory authority to modify rate-reporting requirements, issued regulations that exempted every non-dominant long-distance telephone company from filing its rates. The impact of the FCC‘s actions was that only AT&T had to file its long-distance rates with the FCC. AT&T challenged this exemption as being beyond the authority of the FCC. Issue: Did the FCC exceed its statutory authority? Held: Yes. ―To modify‖ means to change moderately or in a minor fashion. Eliminating all but one company from the rate-filing requirement of the statute is more than a modification. A modification that exempts companies serving 40% of the long-distance companies is hardly a change involving a special circumstance or condition. MCI Tel. Corp. v. American Tel. & Tel. Co., 114 S.Ct. 2223 (1994).
4.
Amtrak sought to purchase 48.8 miles of railroad track from the Boston and Maine Corporation (B&M). When a purchase price could not be reached, Amtrak asked the ICC to acquire this track via the power of eminent domain. B&M objected to the ICC‘s right to acquire this track since Amtrak intended to convey the ownership interest to the Central Vermont Railroad (CV). CV agreed to grant trackage rights to Amtrak. Issue: Was the exercise of eminent domain by the ICC reasonable and subject to the court's deference? Held: Yes. The ICC‘s interpretation of the word required within the meaning of its statutory authority is due deference as a reasonable interpretation of an ambiguous word. National Railroad Passenger Corporation v. Boston and Maine Corporation, 112 S.Ct. 1394 (1992).
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C. Review of Adjudications: Procedural Aspects Emphasize: That judicial review of agencies‘ adjudications by its very nature is quite limited. Administrative agencies develop their own rules of procedure unless mandated otherwise by an act of the legislature. Exhaustion of Remedies Emphasize: What is meant by the doctrine of exhaustion of remedies. How judicial review is available only for final actions by an agency. Why the doctrine of remedies is not an absolute principle. Sidebar 15.6—―Exceptions to Requirement of Exhaustion‖ Primary Jurisdiction Explain: The concept of primary jurisdiction. The situations that require the application of exhaustion and primary jurisdiction. How primary jurisdiction ensures uniformity and consistency in dealing with matters entrusted to an administrative body. Additional Matter for Discussion: The following summary on the doctrine of exhaustion of administrative remedies. Cases for Discussion: 1.
McNeil filed a lawsuit against the United States for harm caused to him while he was a prisoner. Four months later, McNeil submitted a claim for these damages to the Department of Health and Human Services. This claim was promptly denied. The government moved to have McNeil‘s claim dismissed since he failed to exhaust his administrative remedies prior to filing the lawsuit. McNeil argues that the administrative remedy was denied to him prior to any substantial action being made in the litigation process. Issue: Must the administrative remedies be exhausted before the lawsuit is filed? Held: Yes. The statutory command that an ―action shall not be instituted ... unless the claimant shall have first presented the claim to the appropriate Federal agency 1-242
and his claim shall have been finally denied by the agency ...‖ is clear and unambiguous. McNeil v. United States, 113 S.Ct. 1980 (1993). 2.
Darby, a real estate developer, used Garvin, a mortgage banker, to arrange singlefamily mortgage insurance from HUD to cover a development project. Garvin obtained this insurance, as opposed to multiple-family mortgage insurance, by using ―straw purchasers.‖ Garvin and Darby fully informed HUD officials of their plans. When some of the development projects failed, thereby causing liability on behalf of HUD, the department prohibited Darby and Garvin from participating in any HUDadministered project in South Carolina. HUD also sought debarment orders against Darby and Garvin with respect to any procurement contracts with HUD and any nonprocurement contracts with any federal agency. The ALJ entered an order of debarment for an 18-month period. Darby and Garvin filed a lawsuit. HUD sought to have this suit dismissed since they had not exhausted the available administrative remedies. Issue: Can federal courts require a plaintiff to exhaust possible administrative remedies prior to seeking judicial review when neither the statute involved nor the agency rules require exhaustion prior to judicial review? Held: No. Section 10(c) of the Administrative Procedures Act, by its terms, limits the availability of the doctrine of exhaustion of administrative remedies to that which the statute or rule clearly requires. It is inconsistent with the plain language of section 10(c) for courts to require litigants to exhaust optional appeals. Darby v. Cisneros, 113 S.Ct. 2539 (1993).
D. Review of Factual Determinations Emphasize: That the function of courts in reviewing the decisions of agencies is to determine whether the agency proceeded in accordance with law and whether or not its findings and conclusions accorded with statutory standards and were supported by substantial evidence. That in reviewing the sufficiency of the evidence to support the facts found by an agency, courts will only overturn an agency finding if it appears that the evidence upon which the agency acted was devoid of probative value or so meager as to lead to the conviction that the finding does not rest upon a rational basis, or when it appears that the result of the hearing must have been influenced by improper considerations. That Courts do not reweigh the evidence, make independent determinations of fact, or substitute their view of the evidence for that of the agency. 1-243
Additional Matter for Discussion: For a review of the previous topics see Concept Summary—―Judicial Review of Agency Decisions.‖
Cases for Discussion: 1.
Holly Farms Corporation operates numerous poultry facilities, including hatcheries, a feed mill, an equipment maintenance center, and a processing plant. ―Broiler‖ chickens are birds destined for human food markets. Holly Farms hatches broiler chicks at its own hatcheries, and immediately delivers the chicks to the farms of independent contractors. The contractors then raise the birds into full-grown broiler chickens. Holly Farms pays the contract growers for their services, but retains title to the broilers and supplies the food and medicine necessary to their growth. When the broilers are seven weeks old, Holly Farms sends its live-haul crews to reclaim the birds and ferry them to the processing plant for slaughter. The live-haul crews—which typically comprise nine chicken catchers, one forklift operator, and one live-haul driver—travel in a flat-bed truck from Holly Farms‘ processing plant to the farms of the independent growers. At the farms, the chicken catchers enter the coops, manually capture the broilers, and load them into cages. The forklift operator lifts the caged chickens onto the bed of the truck, and the live-haul driver returns the truck, with the loaded cases and the crew, to Holly Farms‘ processing plant. There, the birds are slaughtered and prepared for shipment to retail stores. In 1989, the Chauffeurs, Teamsters and Helpers, Local 391 (Union), filed a representation petition with the National Labor Relations Board, seeking an election in a proposed unit that included live-haul employees working out of Holly Farms‘ Wilkesboro processing plant. Over Holly Farms‘ objection, the Board approved the bargaining unit, ruling that the live-haul workers were ―employees‖ protected by the National Labor Relations Act, rather than ―agricultural laborers‖ excluded from the Act‘s coverage. The Board ordered Holly Farms to bargain with the Union as the representative of the unit. The United States Court of Appeals for the Fourth Circuit enforced the Board‘s order. The court held that the Board‘s classification of the livehaul workers as ―employees,‖ rather than ―agricultural laborers,‖ rested on a reasonable interpretation. Issue: Is the NLRB‘s determination of who is an employee reasonable? Held: Yes. If a statute‘s meaning is plain, the Board and reviewing courts must give effect to the unambiguously expressed intent of Congress. When the legislative prescription is not free from ambiguity, the administrator must choose between conflicting reasonable interpretations. Courts must respect the judgment of the agency 1-244
empowered to apply the law, even if the issue with nearly equal reason might be resolved one way rather than another. For the Board to prevail, it need not show that its construction is the best way to read the statute; rather, courts must respect the Board‘s judgment so long as its reading is a reasonable one. Regardless of how the Board might have resolved the question as an initial matter, the Board‘s decision here reflects a reasonable interpretation of the law. Holly Farms Corporation v. National Labor Relations Board, 116 S.Ct. 1396 (1996). 2.
The Occupational Safety and Health Act assigns distinct regulatory tasks to two independent administrative actors. The Secretary of Labor is charged with setting and enforcing workplace health and safety standards. The Occupational Safety and Health Review Commission is responsible for carrying out adjudicatory functions. The Act also requires a court of appeals reviewing a Commission order to treat as ―conclusive‖ Commission findings of fact that are "supported by substantial evidence.‖ Issue: In the event of a conflict between the Secretary and the Commission, which prevails? Held: The Secretary will prevail. A reviewing court should defer to the Secretary when the Secretary and the Commission furnish reasonable but conflicting interpretations of an ambiguous regulation promulgated by the Secretary under the Act. The power to render authoritative interpretations of the Secretary‘s regulations is a necessary adjunct of the Secretary‘s rulemaking and enforcement powers. The Secretary, as the promulgator of standards, is in a better position than the Commission to reconstruct the purpose of particular regulations. Martin v. Occupational Safety and Health Review Commission, 111 S.Ct. 1171 (1991).
3.
When the Reagan administration took office it reviewed many of the policies and decisions of its predecessor, the Carter administration. It rescinded several rules, including one by the National Highway Traffic Safety Administration (NHTSA), which had required all new cars sold after September, 1982, to include air bags to protect passengers in the event of a collision. This rule was adopted as a motor vehicle safety standard. Several auto insurance companies filed suit challenging the rescission of the air bag rule. The rule had been rescinded on the belief that it was an example of excessive government regulation. Issue: Was the rescission order properly issued? Held: No. NHTSA acted arbitrarily and capriciously. Although the scope of judicial review of an administrative decision is narrow and a court is not to substitute its 1-245
judgment for that of the agency, the agency nevertheless must examine the relevant data and articulate a satisfactory explanation for its action. Here the agency took no account of the critical difference between detachable automatic seatbelts, air bags, and current manual seatbelts. The agency failed to articulate a basis for not requiring nondetachable belts or air bags, and thus failed to offer the rational connection between facts and judgment required to pass muster under the ―arbitrary and capricious‖ test. Motor Vehicle Mfrs. Ass’n. v. State Farm Mut., 103 S.Ct. 2856 (1983). 4.
A candidate who was defeated for office in a union election filed a complaint with the Secretary of Labor alleging union violation of federal law. The Secretary conducted an investigation and decided not to challenge the election. No reasons for the decision were given in the letter to the candidate that notified him of the decision. Issue: Must the Secretary provide the basis for this decision? Held: Yes. Under federal law the Secretary‘s letter was inadequate. The court decided that the letter must specify adequate reasons for the Secretary‘s decision so that a reviewing court could determine whether or not the decision was reached for an impermissible reason or for no reason at all. Dunlop v. Bachowski, 105 S.Ct. 1851 (1975).
III. Criticism of Administrative Agencies (LO 15-3) Emphasize: That the administrative agencies and the regulatory process face many problems and much criticism. At the heart of many of these problems and criticisms is the cost associated with the regulatory process. Sidebar 15.7—―Criticisms of Administrative Process‖ A. The Costs to Business Emphasize: That regulation is a form of taxation. That the existence of a governmental agency usually forces a business subject to the agency‘s jurisdiction to create a similar bureaucracy within its own organization to deal with the agency. Federal administrative agencies are required to work with the Small Business Administration‘s Office of Advocacy as it attempts to lessen the burdens of regulation on small businesses.
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B. The Costs to Society Explain: The primary focus of policymaking by way of such social regulation has not been on balancing the costs of the programs with their potential benefits. That it is difficult to weigh the costs of regulation against the benefits of regulation. That when regulation creates inefficiencies, the cost to the public rises. The size and growth of the Federal Register as discussed in the marginalia to show the increase in regulation. C. Conclusion Emphasize: That all levels of governments are larger and more complex in this decade of the twenty-first century than even 25 years ago. Sidebar 15.8—―Trends in Regulations: Growth of Government in the 20th Century‖ How the U.S. workforce has changed during the past 100 years and how this impacts the need for further regulation and deregulation. The Emergency Economic Stabilization Act of 2008 and why this legislation was necessary.
Answers to Review Questions and Problems
Regulatory Process—Administrative Agencies 1.
Reasons for Agencies There are a variety of reasons that agencies are created. a. Specificity (Example—I.R.S.) b. Expertise (Example—Federal Reserve Board, N.R.C.) c. Public protection (Example—S.E.C., F.D.A, E.P.A.) d. Necessity (Example—Post Office, Social Security Administration) e. Crowded courts (Example—E.E.O.C., Workers‘ Compensation) Students‘ answers will vary for each reason stated above. They may either quote examples from the text or simply research online.
2.
Functions of Agencies 1-247
The four functions of administrative agencies are, rule making, adjudicating, advising, and investigating. 3.
Organization of Agencies a.
b.
4.
The general counsel is the agency‘s chief legal officer and legal advisor. He or she also represents the agency in court and often has a significant impact on the agency‘s policy. The position is so critically important that the general counsel often needs Senate approval to serve. The ALJs perform the adjudicative fact finding functions of the agency. Administrative law judges also hear cases and apply law to facts.
Influencing Agency Decisions The company should certainly write letters stating its position to agency members and appropriate members of Congress. The company should also be sure to have representatives at any public hearings to provide input and monitor the situation.
Judicial Review of Agency Decisions 5.
Standing to Sue The party challenging an agency‘s action must show (a) that this party has been adversely affected by the action and (b) that the agency action is subject to being reviewed by the courts.
6.
Review of Rule Making a.
b.
7.
First, is the delegation of authority to the agency to make rules valid? There must be some clearly stated authority granted to the agency. Second, has the authority granted been exceeded? The agency‘s rule making must be within the boundaries of its authority. Court should defer to the administrative decision unless it is clearly wrong. In most cases, courts do not reverse decisions of the agencies even though they may observe that an agency has got its decision wrong.
Review of Adjudications: Procedural Aspects The plaintiff may need to exhaust all other remedies because the general rule is that judicial 1-248
review of an administrative decision may not be had until the aggrieved party has exhausted all administrative remedies. The purpose of the doctrine of exhaustion of administrative remedies is to allow administrative agencies to correct their own errors, clarify policies, and reconcile conflicts before resorting to judicial relief. An exception to the doctrine of exhaustion of administrative remedies is a suit based on the theory of fraud by the administrative agency or its personnel. Smith v. Jones, 474 N.E.2d 415 (Ill.App. 3 Dist. 1985). 8.
Review of Factual Determinations Courts defer to agencies‘ determinations of the facts so long as there is a reasonable basis for these findings.
Criticism of Administrative Agencies 9.
The Costs to Business Regulation adds to the monetary costs of doing business, which are then often passed on to the public. Businesses need to create internal bureaucracies to deal with the agency that regulates in their industry. Regulations frequently create barriers to new competitors entering the market and regulations can at times stifle innovation. Furthermore, the simple costs regarding paperwork and filing requirements can be significant.
10. The Costs to Society In most cases it is difficult and nearly impossible to weigh costs against benefits regarding regulations. Putting a dollar amount on a human life in comparison to the cost of the regulation can‘t be properly done. Life, health, and mobility are examples of things not bought or sold; how can one place a monetary value on a regulation that enhances or protects such things? 11. Conclusion The nature of bureaucracies is continued growth. Throughout history, administrative agencies have had an expanding role in our lives.
Business Discussion #1 1.
Is this company regulated only by the federal government, or are state and local regulations 1-249
relevant? Both are relevant. As discussed in this chapter, the federal government‘s primary source of authority to regulate business is the Commerce Clause found in Article I, Section 8 of the United States Constitution. The authority of state and local governments is found in the police powers, which inherently allows for the protection of the public‘s health, safety, morals, and general welfare. 2.
How does the company and its divisions keep track of laws and regulations? There are multiple administrative agencies created with a view of regulating various departments within an organization. These departments ensure that there is no violation on the part of the company. These agencies maintain meticulous records of rules and regulations a company needs to follow. Also, agencies like the OSHA conduct regular checks to assess potentially unsafe and illegal practices.
3.
If an administrative agency begins an investigation of your company, should your company cooperate with or fight the agency’s action? The answer depends on the nature of the investigation and the desired outcome. Cooperation can lead to a negotiated consent order. Fighting can produce expensive litigation, which may or may not be beneficial. Regardless of the approach taken by the company, remember the agency‘s action should not be ignored. Also remember courts often defer to the administrator‘s decision, so the outcome may be determined in the administrative process.
Business Decision #2 1.
Should you continue to seek review of your case before the agency’s officials? If the sanctions imposed by the administrative agencies are unfair, you can try and first exhaust all the administrative remedies available before approaching a court of law where you can then request a review. Students‘ answers will vary.
2.
Should you appeal by filing a lawsuit to reverse the agency’s decision? The concept of primary jurisdiction can be applied to answer this question. The idea of primary jurisdiction is that although a court can rule in a case involving an agency, it does not do so unless the agency or competent tribunal addresses the issue first. Therefore, if one were to file a suit against an agency‘s decision, it would be advisable to do so once all other 1-250
remedies have been exhausted and the issue addressed by a competent Tribunal. Students‘ answers will vary. 3.
If you are successful in court, under what circumstances can you recover your attorney’s fees? Students‘ answers will vary. Provided it has exhausted all administrative remedies and the agency is directed by the court to do so.
Business Decision #3 1.
To what degree does the FTC have authority to question your business practices? The FTC has been delegated the power to investigate and regulate actions in commerce that constitute unfair or deceptive trade practices that affect the public. The FTC does have the right to investigate your company‘s practices if the public may be harmed.
2.
Are your clearly stated contractual provisions unfair or deceptive? It certainly appears that the company‘s definition of same day delivery does not fairly represent the plain meaning of the phrase nor does it mirror the public‘s perception of the phrase.
3.
Should you cooperate with the investigator or seek a court order enjoining this investigation? Cooperation is best because the FTC appears to be well within their jurisdiction and authority. An injunction is unlikely, as the courts will defer to the FTC in this matter.
4.
How do you challenge the FTC’s action if a formal complaint is filed against your company? One may seek review before the administrative law judge for the FTC where evidence and testimony may be presented and a fair hearing will be conducted. One may not file in court until all administrative remedies have been exhausted.
Chapter 16 Regulating Competition—Antitrust Laws 1-251
Learning Objectives This chapter introduces the student to antitrust law. The purpose of the chapter is to familiarize the student with basic antitrust laws, the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. Students should understand that these antitrust laws were enacted to make the U.S.‘s competitive economic system work. Students will discover why laws approximately 100 years old are still relevant in today‘s market. The antitrust sanctions will be emphasized as well as when antitrust laws are not applicable to protect certain business endeavors. Students should become familiar with the fundamental aspects of the Sherman Act, its exemptions, and typical violations of this act. Furthermore, students should gain an appreciation of how Congress and the courts attempt to close loopholes left by the Sherman Act. This understanding is gained through the study the Federal Trade Commission activities along with the study of the Clayton Act and the FTC Act.
References
Ewing, K.P., Competition Rules for the 21st Century: Principles from America‘s Experience, 2nd Edition. Kluwer Law International (2006) Gordon, R.L., Antitrust Abuse in the New Economy: The Microsoft Case. Edward Elgar (2002). Greider, K., The Big Fix: How the Pharmaceutical Industry Rips Off American Consumers. Public Affairs (2003). Haas-Wilson, D., Managed Care and Monopoly Power: The Antitrust Challenge. Howard University Press (2003). Holmes, D. and W. Holmes, Antitrust Law Sourcebook for the United States and Europe, 4th edition. West Publishing (2019-20 Edition). Holmes, W.C., Antitrust Law Handbook, 2019-20 Edition. West Publishing (2019). Hovenkamp, H., The Antitrust Enterprise: Principle and Execution. Harvard University Press (2005). Hovenkamp, H., Hovenkamp Hornbook on Federal Antitrust Policy, The Law of Competition and Its Practice, 6th Edition. West Publishing (2020). Kwoka, J.E. and L.J. White, The Antitrust Revolution: Economics, Competition and Policy. Oxford University Press (2004). Mason, C., The Art of the Steal: Inside the Sotheby‘s-Christie‘s Auction House Scandal. 1-252
G.P. Putnam‘s Sons (2004). Mourdoukoutas, P., Business Strategy in a Semiglobal Economy. M.E. Sharpe (2006). Sherman, A., Mergers and Acquisitions from A to Z, 3rd edition. AMACOM (2011). Sullivan, L.A., W.S. Grimes, C.L. Sagers, Hornbook on the Law of Antitrust: An Integrated Handbook, 3rd edition. West Publishing (2016). Viscusi, W.K., J. Harrington, and J. Vernon, Economics of Regulation and Antitrust. MIT Press (2005). Wells, W.C., Antitrust and the Formation of the Postwar World. Columbia University Press (2002).
Teaching Outline
I. Introduction A. Historical Development (LO 16-1) Emphasize: The definition of a trust. How the trust device was used to form some of the first monopolies. Explain that trusts still have many legal uses, such as in estate planning. The meaning of the term ―antitrust law.‖ The reasons for the adoption of the Sherman Act. The reasons for the adoption of the Clayton Act. The reasons for the adoption of the Federal Trade Commission Act. That the Justice Department and the FTC enforce the antitrust laws on behalf of government. The private attorney general concept and the importance of suits by individual competitors and customers. Additional Matters for Discussion: That the goal of antitrust law is workable competition. Validity of the assumption made in defining ―workable competition.‖ II. The Sherman Act, Section 1—Agreements in Restraint of Trade (LO 16-2) Emphasize: Section 1 of the Sherman Act and what it states. The restraints of trade imposed by Section 1. 1-253
That joint activities by two or more persons may constitute a violation of Section 1. The concept of price fixing. Figure 16.1—―Horizontal Restraints‖ Figure 16.2—―Vertical Restraints‖ A. Analysis in Antitrust Law The Rule of Reason Emphasize: The provision that is stated in Sherman Act Section 1. That the United States Supreme Court has held that Congress did not really mean it when it used the word ―every.‖ How the rule of reason was announced in Standard Oil Co. v. United States case. Per Se Illegality Emphasize: How agreements falling within the per se category represents cases of clearly wrongful conduct. How courts distinguish between rule of reason and per se illegality. That Sherman Act cases must satisfy an interstate commerce element. Case for Discussion: 1.
A physician claimed that a hospital and its medical staff conspired to misuse a congressionally regulated peer review process to exclude him from the market for ophthalmological services in Los Angeles. Issue: Is there a sufficient nexus with interstate commerce to support federal jurisdiction under Section 1 of the Sherman Act? Held: Yes. A proper analysis of the alleged conspiracy in restraint of interstate trade in violation of Section 1 focuses upon potential harm that would ensue if the conspiracy were successful, not upon its actual consequences. If the conspiracy is successful, there will be a reduction in the services available. The boycott of a single surgeon may have a general impact on the market. Summit Health Ltd. v. Pinhas, 111 S.Ct. 1842 (1991).
Additional Matter for Discussion: The National Cooperative Production Amendments Act of 1993. This law 1-254
encourages joint production ventures. The joint ventures, which must notify the Justice Department and the FTC, are judged under the rule of reason standard. Also, in a private enforcement action, the plaintiff can recover only actual damages—triple damages are not allowed. B. Horizontal Price Fixing Describe: The concept of horizontal price fixing and what it involves. The per se rule makes price fixing illegal whether the parties to it have control of the market or not and whether or not they are trying to raise or lower the market price. That even the fixing of reasonable prices is illegal. It is illegal to agree to: raise or lower prices; charge a fixed price; not charge above a stated price; or limit supply. Table 16.1—―Examples of Horizontal Price-fixing Cases‖ Emphasize: Case 16.1—―Posterman v. American Airlines, 747 Fed. Appx. 458 (9th Cir. 2018) on collusion between airlines to restrain trade.‖
Cases for Discussion: 1.
Plaintiffs, beer retailers, brought suit alleging that their wholesalers had engaged in an unlawful conspiracy to restrain trade by refusing to sell beer unless plaintiffs paid cash in advance or at the time of the delivery. The wholesalers had an agreement that none of them would grant short-term credit, although such credit had been extended in the past. Issue: Is the agreement illegal per se? Held: Yes. Extending interest-free credit for a period of time is equivalent to giving a discount equal to the value of the use of the purchase price for that period of time. Thus, credit terms must be characterized as an inseparable part of the price. Catalano, Inc. v. Target Sales, Inc., 100 S.Ct. 1925 (1980).
2.
The National Society of Professional Engineers adopted a rule in its code of ethics that prohibited competitive bidding by members. This was done to minimize the risk that competition would result in inferior engineering work, which would endanger the public safety. The United States brought a civil suit to nullify the canon of ethics. Issue: Is the canon a violation of Section 1 of the Sherman Act? 1-255
Held: Yes. The act does not require competitive bidding; it prohibits unreasonable restraints on competition. It is the restraint that must be justified under the rule of reason. Petitioner‘s attempt to do so on the basis of the potential threat that competition poses to the public safety and the ethics of its profession is nothing less than a frontal assault on the basic policy of the Sherman Act. Even assuming occasional exceptions to the presumed consequences of competition, the statutory policy precludes inquiry into the question of whether competition is good or bad. National Society of Professional Engineers v. U.S., 98 S.Ct. 1355 (1978). 3.
Plaintiffs contracted to buy a home in Fairfax County, Virginia. They were unsuccessful in finding a lawyer who would perform the required title examination for less than the fee prescribed in a minimum-fee schedule published by the Fairfax County Bar Association and enforced by the Virginia State Bar. They brought a class action suit seeking injunctive relief and damages alleging that the minimum-fee schedule constituted price fixing, in violation of Section 1 of the Sherman Act. Issue: Are minimum-fee schedules subject to Section 1 of the Sherman Act? Held: Yes. A rigid price floor resulted from the defendants‘ activities. The schedule was enforced through the threat of professional discipline. The title examination is an integral part of an interstate transaction and therefore affects commerce. There is no evidence that Congress intended a sweeping exclusion for learned professions. The fact that the state bar is a state agency for some limited purposes does not create an antitrust shield that allows it to foster anticompetitive practices for the benefit of its members. Goldfarb Et Ux v. Virginia State Bar, Et Al., 95 S.Ct. 2004 (1975).
C. Vertical Price Fixing Emphasize: The terms vertical price fixing or resale price maintenance. Why retailers resort to such efforts. That although resale price-maintenance schemes can run afoul of the Sherman Act, it is possible for a manufacturer to control the resale price of its products. The Colgate Doctrine. Cases for Discussion: 1.
Barkat U. Khan and his corporation entered into an agreement with State Oil Company to lease and operate a gas station and convenience store owned by State Oil. The 1-256
agreement provided that Khan would obtain the station‘s gasoline supply from State Oil at a price equal to a suggested retail price set by State Oil, less a margin of 3.25 cents per gallon. Under the agreement, Khan could charge any amount for gasoline sold to the station‘s customers, but if the price charged was higher than State Oil‘s suggested retail price, the excess was to be rebated to State Oil. Khan could sell gasoline for less than State Oil‘s suggested retail price, but any such decrease would reduce their 3.25 centsper-gallon margin. About a year after Khan began operating the gas station, he and his company fell behind in lease payments. State Oil then gave notice of its intent to terminate the agreement and commenced a state court proceeding to evict. Khan sued State Oil claiming that State Oil has engaged in price fixing in violation of § 1 of the Sherman Act by preventing Khan from raising or lowering retail gas prices. The District Court found that the allegations in the complaint did not state a per se violation of the Sherman Act because they did not establish the sort of ―manifestly anticompetitive implications or pernicious effect on competition‖ that would justify per se prohibition of State Oil‘s conduct. The Court of Appeals reversed. Issue: What is the appropriate standard of antitrust analysis when judging the legality of vertical maximum price fixing? Held: The rule of reason. Although the Sherman Act‘s terms prohibit every agreement in ―restraint of trade,‖ the Court recognizes that only unreasonable restraints are illegal. The Court reviewed its holdings in Dr. Miles Medical Co., Socony-Vacuum Oil Co., Kiefer-Stewart Co., White Motor Co., Schwinn Co., Albrecht, and GTE Sylvania. The rule-of-reason analysis will effectively identify those situations in which vertical maximum price fixing amounts to anticompetitive conduct. State Oil Company v. Khan, 118 S. Ct. 275, (1997). 2.
Monsanto manufactures agricultural herbicides. Spray-Rite was an authorized Monsanto distributor. Monsanto canceled Spray-Rite‘s distributorship after receiving complaints from other distributors that Spray-Rite was cutting prices. Spray-Rite sued for triple damages. Monsanto contended that the distributorship was terminated because SprayRite had failed to hire trained salespeople and promote sales adequately, not because of the complaints. Issue: Is proof of termination following a competitor‘s complaint enough to make the conduct illegal per se? Held: No. There are two distinctions in distributor-termination cases. First, there is the distinction between concerted and independent actions: concerted activity is illegal; independent action is not. The second distinction is between concerted action to set 1-257
prices and concerted action on nonprice restrictions. The former are illegal per se, and the latter are judged under the rule of reason. A price-fixing agreement cannot be inferred from the existence of complaints from other distributors or even from the fact that termination came in response to such complaints. Something more than evidence of complaints is needed to prove price-fixing. Note: The evidence here was sufficient to prove the violation. Monsanto Co. v. Spray-Rite Service Corp., 104 S.Ct. 1464 (1984). 3.
Union Oil requires lessees of its retail service stations to sign ―consignment‖ agreements, which allow Union Oil to set the prices at which the retailer sells gasoline. The agreement provides that title to the gas remain in Union Oil until sold by the retailer and that all property taxes be paid by Union Oil. Retailers were then to be paid by a commission on sales made and had to pay all the costs of operating the station. Simpson, a retailer of Union Oil gasoline, sold gasoline at 2 cents below the price set by Union, and because of this, Union refused to renew his lease. Simpson sued for triple damages claiming the consignment contract violated the Sherman Act. Issue: Should Simpson recover? Held: Yes. Although consignment agreements serve useful purposes, they only control and allocate the risks and rights between the parties and do not necessarily control the rights of others. Therefore, no matter how lawful it is under private contract law, a consignment agreement must comply with federal antitrust policy. Dealers are independent business people—they have all the characteristics of entrepreneurs except setting prices. Their return is affected by the rise and fall of market price. These agreements allow Union Oil to impose noncompetitive prices on retailers by the use of coercive consignments. Simpson v. Union Oil Co., 377 U.S. 13 (1964).
4.
Parke Davis announced that it would sell its products only to those wholesalers and retailers who observed minimum resale prices suggested by Parke Davis. To promote compliance, Parke Davis refused to sell to any wholesaler who supplied its products to any retailer that did not observe the suggested minimum retail prices. Several retailers continued to sell Parke Davis vitamins at a discount, and when their names were furnished to the wholesalers, both Parke Davis and the wholesalers refused to fill their orders for any of the manufacturer‘s products. Issue: Were these actions a violation of the Sherman Act? Held: Yes. The program upon which Parke Davis embarked to promote general compliance with its suggested resale prices plainly exceeded the limitations of the Colgate Doctrine. Parke Davis did not content itself with announcing its policy 1-258
regarding retail prices and following this with a simple refusal to have business relations with any retailers who disregarded that policy. United States v. Parke, Davis & Co., 362 U.S. 29 (1960). D. Indirect Price Fixing Emphasize: The indirect attempts to fix prices by businesspersons. Additional Matter for Discussion: For review, see Concept Summary: Price Fixing Case for Discussion: 1.
The only two daily newspapers of general circulation in Tucson, Arizona, the Citizen and the Star, signed a joint operating agreement. Under this agreement, each paper retained its own news and editorial department and its corporate identity. Tucson News, Inc. (TNI), owned equally by both parties, was formed to manage all other departments for each paper. The agreement eliminated competition between the parties through three control devices: (a) price-fixing—distribution, sales and placement of advertising were all handled by TNI, while subscription and advertising rates were set jointly; (b) profit pooling—all profits were commingled and distributed pursuant to an agreed ratio; and (c) market control—neither paper nor its stockholders could engage in the other competing business, that is, publishing, in the Tucson metropolitan area. Issue: Is this arrangement illegal? Held: Yes. It is a Sherman Act violation. Price-fixing is illegal per se. Profit pooling at a set ratio reduces, and possibly eliminates, incentive to compete. The market control arrangement is a ―division of fields,‖ prohibited by the Sherman Act. Citizen Publishing Co. et al. v. United States, 89 S.Ct. 927 (1969).
E. Territorial Agreements Emphasize: The reasons why companies competing with each other enter into a horizontal territorial agreement. That this is illegal under the Sherman Act. A vertical territorial agreement. Horizontal territorial agreements are illegal per se; vertical territorial restrictions are 1-259
subject to the rule of reason. Case for Discussion: 1.
A manufacturer of television sets marketed its products through a retail franchise system that required franchisees to sell its products only from the locations at which it was franchised. A disenchanted franchisee claimed that defendant had violated Section 1 of the Sherman Act by entering into and enforcing these agreements. Issue: Are vertical territorial restrictions per se violations? Held: No. Territorial restrictions are subject to the rule of reason. Vertical restrictions reduce intra-brand competition but promote inter-brand competition. As such, inquiries as to the harm, if any, on competition are required. Continental T.V., Inc. v. GTE Sylvania, Inc., 97 S.Ct. 2549 (1977).
F. Concerted Activities Emphasize: The meaning of the term ―concerted activity.‖ That concerted activities may be beneficial to society even if competition is reduced. Some medical research is an example. Other examples of the benefits of concerted activity. The National Cooperative Research Act, 1984. The National Cooperative Production Amendments Act does not protect joint production ventures from all possibilities of antitrust violations. Case 16.2—―American Needle, Inc. v. National Football League‖ Sidebar 16.1—―Basic Provisions of National Cooperative Production Amendment Act‖ Additional Matters for Discussion: The National Cooperative Research Act. II. The Sherman Act, Section 2—Monopolization (LO 16-3) Explain: The purpose of Sherman Act, Section 2 in regulating monopoly. The two ways in which a plaintiff can prove that a defendant violated the law. The concept of predatory behavior of organizations. The concept of predatory pricing. Sidebar 16.2—―Are Big Tech Companies Monopolists?‖ 1-260
Case 16.3—―Apple, Inc. v. Pepper on whether Apple exercises monopoly power over iPhone apps.‖ Sidebar 16.3—―Proving That an Illegal Monopoly Exists is Not Easy‖
Case for Discussion: 1.
Through a series of relationships and transactions, Spectrum Sports, Inc. became the national distributor for sorbothane (a patented elastic polymer) in athletic shoes. Sorboturf, Inc., which had been a distributor of sorbothane, failed as a business. Sorboturf, Inc. sued Spectrum Sports, Inc. for violating § 2 of the Sherman Act. The jury found that Spectrum Sports, Inc. was ―monopolizing, attempting to monopolize, and/or conspiring to monopolize.‖ The court of appeals upheld the jury‘s verdict ($1,743,000 to be tripled plus almost $100,000 in attorney‘s fees) even though there was no specific finding by the jury as to Spectrum‘s precise violation. Issue: Is a jury required to focus on the alleged violator‘s intent to monopolize a particular (relevant) market? Held: Yes. Intent to monopolize alone is insufficient to establish the dangerous probability of success, which requires inquiry into the relevant product and geographical market and the alleged violator‘s economic power in that market. Spectrum Sports Inc. v. McQuillan, 113 S.Ct. 884 (1993). Additional Matters for Discussion: The concept of predatory conduct. Sidebar 16.2—―Example of Monopoly‖
A. Analysis in Antitrust Law Emphasize: The rule of reason and the concept of per se illegality. Note that if an activity is per se illegal, all that is required is proof of the activity. Proof of anticompetitive effect is not required. Case for Discussion: 1.
Through its Code of Ethics and local dental societies, the California Dental Association, a nonprofit organization, attempted to limit the amount of advertising dentists could do. The Federal Trade Commission alleged that the CDA unreasonably restricted advertising of discounted fees and of the quality of dental services. The FTC found the 1-261
CDA‘s restrictions were an unreasonable restraint of trade under the Sherman Act (and a violation of § 5 of the FTC Act). The FTC used an abbreviated rule-of-reason (quicklook) analysis. The 9th Circuit affirmed the FTC‘s findings and conclusions. Issue: What type of antitrust analysis is appropriate in this case? Held: The rule of reason analysis. The CDA restrictions might be viewed as having a procompetitive effect. Restrictions on misleading or deceptive advertising can be viewed as protecting patients. Thus, a more thorough analysis than a quick assumption is necessary to judge the degree of restraint imposed by such restrictions. The quicklook analysis used by the FTC is not sufficient. California Dental Association v. Federal Trade Commission, 119 S.Ct. 1604 (1999). III. Sherman Act Sanctions and Exceptions (LO 16-4) A. Sanctions Emphasize: The four types of sanctions recognized by the Sherman Act as amended by the Clayton Act. That the Sherman Act empowers courts to grant injunctions at the request of the government or a private party that will prevent and restrain violations of its provisions. Section 4 of the Clayton Act authorizes such victims in a civil action to collect three times the damages they have suffered plus court costs and reasonable attorneys‘ fees. The concept of ―nolo contendere.‖ Tie this plea to the treble damage remedy by emphasizing that a guilty plea of finding in a criminal case is prima facie evidence of a violation in a subsequent civil action for treble damages. Figure 16.3—―Criminal Antitrust Fines‖ Cases for Discussion: 1.
Monfort is the country‘s fifth-largest beef packer. Excel Corporation (Excel), the second-largest packer, is a wholly owned subsidiary of Cargill, Inc., a large privately owned corporation with more than 150 subsidiaries in at least 35 countries. Excel signed an agreement to acquire the third-largest packer in the market, Spencer Beef, a division of the Land O‘Lakes agricultural cooperative. Spencer Beef owned two integrated plants and one slaughtering plant. After the acquisition, Excel would still be the secondlargest packer, but would command a market share almost equal to that of the largest packer, IBP, Inc. (IBP). Monfort brought an action to enjoin the prospective merger. Its complaint alleged that the acquisition would violate Section 7 of the Clayton Act 1-262
because the effect of the proposed acquisition may be substantially to lessen competition or tend to create a monopoly in that it would impair Monfort‘s ability to compete. Issue: Is Monfort entitled to an injunction? Held: No. A plaintiff seeking injunctive relief must show a threat of antitrust injury, and that a showing of loss or damage due merely to increased competition does not constitute such injury. Cargill, Inc. v. Monfort of Colorado, Inc., 107 S.Ct. 484 (1986). 2.
Brunswick is one of the two largest manufacturers of bowling equipment selling its equipment to bowling centers on credit. When the bowling industry declined in the early 1960s, many bowling centers went into default. In order to combat its own financial difficulty, Brunswick began acquiring and operating defaulting bowling centers. Although these acquisitions made it the largest operator of bowling centers, it controlled only 2 percent of the bowling centers in the United States. The plaintiffs, operators of bowling centers, sought treble damages, claiming they would have made a higher profit if Brunswick had allowed the defaulting centers to close. Issue: Do they state a valid claim for damages? Held: No. Antitrust damages are not available when the injury alleged is that competitors were continued in business, thereby damaging plaintiffs‘ anticipated increase in the market share. The plaintiffs‘ loss of income that would have accrued had the failing centers acquired by the manufacturer of bowling equipment gone bankrupt was not the type of injury the Clayton Act was intended to cover. The antitrust laws were enacted to protect competition—not competitors. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 97 S.Ct. 690 (1977).
3.
Several states that were indirect purchasers of cement brought class action suits against cement producers alleging a conspiracy to fix prices. Suit was based on state antitrust laws that allow suit by indirect purchasers to recover overcharges passed on to them by direct purchasers. Issue: Are state antitrust statutes that permit indirect purchasers to recover overcharges pre-empted by federal law? Held: No. The Illinois Brick doctrine does not prevent recovery under state laws. California v. ARC America Corp., 109 S.Ct. 1661 (1989).
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Additional Matters for Discussion: That an attorney may be individually liable under the antitrust laws if they exceed their role as a legal advisor and become an active participant in formulating policy decisions to restrain competition. The immunity granted municipalities under the Local Government Antitrust Act. That the U.S. is now entitled to collect triple damages. For Review see Concept Summary: Antitrust Sanctions. A. Exemptions Emphasize: That certain businesses may be exempt from the Sherman Act because of a statute or as the result of a judicial decision. That among activities and businesses for which there are statutory exemptions are insurance companies; farmers‘ cooperatives; shipping, milk marketing, and investment companies. That the state action exemption was created in the famous case of Parker v. Brown. That the doctrine called Noerr-Pennington doctrine is based on the First Amendment. Point out the importance of the free flow of information and the right to petition government for a change in the law. Sidebar 16.4—―Antitrust vs. Securities Laws‖ Cases for Discussion: 1.
Professional Real Estate Investors, Inc. (PRE) copied hundreds of videotapes for use by hotel guests for in-room viewing. Several movie production studios sued PRE for copyright infringement. PRE counterclaimed that these defendants were engaged in a conspiracy that violated the antitrust law. The defendant moved for summary judgment on the counterclaim since their infringement suit is exempt under Noerr-Pennington. Issue: Is the infringement suit a sham that denies the studios the exemption from the antitrust law? Held: No. The existence of probable cause to begin a legal proceeding precludes a finding that the litigation is a sham. The Court agrees that the studios had probable cause to institute the infringement lawsuit. Professional Real Estate Investors v. Columbia Pictures, 113 S.Ct. 1920 (1993).
2.
A group of lawyers who regularly acted as court-appointed counsel for indigent defendants in District of Columbia criminal cases agreed to stop providing such 1-264
representation until the District increased their compensation. The boycott had a severe impact on the District‘s criminal justice system, and the District government capitulated to the lawyers‘ demands. After the lawyers returned to work, the Federal Trade Commission (FTC) filed a complaint alleging a conspiracy to fix prices and to conduct a boycott that constituted unfair methods of competition in violation of § 5 of the FTC Act. Issue: Are Noerr-Pennington and the First Amendment a defense? Held: No, it is a per se violation (price fixing). The Noerr doctrine does not extend to horizontal boycotts designed to exact higher prices from the government simply because they are genuinely intended to influence the government to agree to the conspirators‘ terms. F.T.C. v. Superior Court Trial Lawyers Assn., 110 S.Ct. 768 (1990). 3.
The country‘s largest producer of steel electrical conduit attempted to prevent the National Fire Protection Association from approving the use of plastic conduit in the National Electric Code. Issue: Is this action exempt from the Sherman Act? Held: No. Efforts to influence private associations that set product safety standards that are routinely incorporated into state and local laws are not immune from antitrust liability under the Noerr-Pennington Doctrine, which protects petitioning of government officials. The association is not a quasi-legislative body. Allied Tube & Conduit Corp. v. Indian Head, Inc., 108 S.Ct. 1931 (1988).
4.
A surgeon alleged that a competing clinic‘s physicians initiated and participated in peer review proceedings to terminate his privileges in the city‘s only hospital. He asserted that the proceedings were brought to reduce competition rather than to improve patient care. Issue: State action exemption? Held: No. The state does not actively supervise the peer review process. The state does not actively supervise the termination of hospital staff privileges unless a state official has and exercises ultimate authority over private privilege determination. A state official has this kind of authority only if he or she has power to review private peer-review decisions and overturn a decision that fails to accord with state policy. Patrick v. Burget, 108 S.Ct. 1658 (1988).
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5.
Rate bureaus representing common carriers in five southeastern states provided a forum for carriers to discuss and agree on rates for intrastate transportation of commodities. These rates were then proposed to the public service commissions for approval. The U.S. instituted action to enjoin this activity. Issue: Is the state action exemption applicable? Held: Yes. It is not enough that the anticompetitive conduct is prompted by state action; it must be compelled by the state. The rate bureaus are entitled to Sherman Act immunity under the state action doctrine. Southern Motor Carriers Rate Conference, Inc. v. United States, 105 S.Ct. 1721 (1985).
6.
Government brought antitrust action against a nonprofit cooperative association whose members were involved in production and marketing of broiler chickens. Certain members of the association owned neither breeder flocks nor hatcheries and maintained no grow-out facilities to raise flocks. Issue: Are they exempt? Held: No. Such members were not ―farmers‖ under the Capper-Volstead Act, and thus association was not entitled to the act‘s limited protection from antitrust laws. National Broiler Marketing Ass’n. v. United States, 98 S.Ct. 2122 (1978).
IV. The Clayton Act (LO 16-5) A. Introduction Emphasize: The provisions of the Clayton Act and its policy to stop anti-competitive practices in their ―incipiency‖ by making the Sherman Act more specific. Violations of the original Clayton Act were not crimes, and the act contained no sanction for forfeiture of property. B. Price Discrimination Emphasize: The reasons why Section 2 of the Clayton Act was adopted and what it constituted. That the Robinson-Patman Amendment was designed to eliminate illegal price discrimination between large and small buyers. That the amendment applies only to activities in interstate commerce. 1-266
The various levels of competition that may be involved. That the prevalence of these practices led to the enactment of the Robinson-Patman Amendment to Section 2. The role of the Robinson-Patman amendment. The Robinson-Patman amendment made it illegal to sell at unreasonably low prices to drive out a competitor. Discuss the reasons for outlawing such activities. Figure 16.4—―Analysis of Pricing‖
Cases for Discussion: 1.
Texaco sold gasoline directly to 12 independent Texaco dealers at retail tank wagon prices (RTW). It also sold gasoline to two wholesale distributors, Gull and Dompier, who in turn supplied stations competing with the Texaco stations. The sales price to Gull and Dompier were 3¢ and 6¢ per gallon less than the RTW. As a result of Gull and Dompier passing these savings on to their dealers, the volume of sales at the Texaco stations dropped dramatically. The Texaco dealers sued alleging a violation of Section 2(a) of the Robinson-Patman Amendment. Texaco defended on the ground that the price differential was a legitimate functional discount between wholesalers and retailers. Issue: Is Texaco‘s price differential justified as a functional discount? Held: No. A functional discount that constitutes a reimbursement for the purchaser‘s actual marketing functions (such as a wholesaler transporting or storing the items sold) will not violate the Robinson-Patman Amendment. However, not every functional discount is entitled to a judgment of legitimacy. It sometimes will be possible to produce evidence showing that a particular functional discount caused a price discrimination of the sort prohibited. In this case, there was no substantial evidence indicating that the discounts to Gull and Dompier constituted a reasonable reimbursement for the value to Texaco of their actual marketing function. Dompier was separately compensated for its hauling function, and neither wholesaler maintained significant storage facilities. The evidence indicates that Texaco affirmatively encouraged Dompier to expand its retail business and that Texaco was fully informed about the persistent and marketwide consequences of its own pricing policies. Indeed, its own executives recognized that the dramatic impact on the market was almost entirely attributable to the magnitude of the distributor discount and the hauling allowance. Texaco Inc. v. Hasbrouck, 110 S.Ct. 2535 (1990).
2.
The University of Alabama Medical School operates a pharmacy. Drug manufacturers sold drugs to these pharmacies at lower prices than they sold the same drugs to other pharmacies. 1-267
Issue: Is the sale of pharmaceutical products to state and local government hospitals for resale in competition with private retail pharmacies exempt from the proscriptions of the Robinson-Patman Act? Held: No. The statutory language—―persons‖ and ―purchasers‖—is sufficiently broad to cover governmental bodies. Jefferson Cty. Pharmaceutical Ass’n v. Abbott Labs, 103 S.Ct. 1011 (1983). 3.
The plaintiff, a former automobile dealer, brought suit against the defendant automobile manufacturer, alleging that the defendant‘s ―sales incentives‖ programs over a certain period violated the Robinson-Patman amendment. Under these programs, Chrysler paid a bonus to its dealers if they exceeded their sales quotas. The plaintiff alleged that its quotas were higher than those of its competitors, that it ultimately received fewer bonuses than did its competitors, and that the net effect was that it paid more for its automobiles than did its competitors. It sought as damages the amount of the price difference multiplied by the number of cars purchased. Issue: Is the plaintiff entitled to ―automatic damages‖ upon a showing of a substantial price discrimination? Held: No. By its terms, Section 2(a) of the Clayton Act as amended by the RobinsonPatman amendment is a preventative statute. It does not require that the price discrimination must in fact have harmed competition. In contrast, Section 4 of the Clayton Act is essentially a remedial statute; under it a plaintiff must make a showing of actual injury attributable to something the antitrust laws were designed to prevent in order to recover triple damages. Proof of a violation of Section 2(a) establishes only that injury may result; therefore, proof of a violation does not mean that a disfavored purchaser has been actually ―injured‖ within the meaning of Section 4. A plaintiff must prove more than a violation of Section 2(a). (The court remanded the case so that the Court of Appeals could consider the sufficiency of the evidence of injury.) J. Truett Payne Co. v. Chrysler, 102 S.Ct. 1923 (1981).
4.
Standard Oil sold gasoline at a lower price to another oil company, which in turn sold it to a wholesaler, who in turn sold it to a competitor of the plaintiff at a price that was still lower than the price paid by the plaintiff for similar gasoline. Issue: Is this type of price discrimination within the coverage of Robinson-Patman? Held: Yes. The law does not immunize Standard‘s price discrimination simply because 1-268
the product in question passed through an additional formal exchange before reaching the level of Perkins‘ actual competitor. From Perkins‘ point of view, the competitive harm done him by Standard is certainly no less because of the presence of an additional link in this particular distribution chain from the producer to the retailer. Perkins v. Standard Oil Company of California, 89 S.Ct. 1871 (1969). Additional Matters for Discussion: The near impossibility of proving costs and the cost justification defense. (Review the role of indirect costs in cost accounting.) The definition of ―good faith‖ and the reasons for the meeting of competition defense. That the meeting of competition defense applies to buyers as well as sellers. C. Special Arrangements Emphasize: The role of Section 3 of the Clayton Act. A tying contract is one in which a product is sold or leased only on the condition that the buyer or lessee purchase a different product or service from the seller or lessor. That in addition to being addressed by the Clayton Act, courts have found tying arrangements to violate section 1 of the Sherman Act. That some tying agreements may be illegal per se. This occurs if coercion is involved or if it results from the exercise of market power that is exploited. Sidebar 16.5—―Tying Contacts, Patents, and Standard of Review‖ Case for Discussion: 1.
A hospital had a contract with a firm of anesthesiologists requiring all anesthesiological services for the hospital‘s patients to be performed by that firm. Because of this contract, the plaintiff anesthesiologist‘s application for admission to the hospital‘s medical staff was denied. The plaintiff sought an injunction. He claimed that the exclusive contract was illegal because it forced the users of the hospital‘s operating rooms (the tying product) to purchase the hospital‘s chosen anesthesiological services (the tied product) and therefore constituted an illegal ―per se‖ tying arrangement. Issue: Is the arrangement by the hospital illegal? Held: No. It is not a per se violation and no unreasonable restraint of competition. The essential characteristic of an invalid tying arrangement lies in the seller‘s exploitation of its control over the tying product to force the buyer into purchasing a tied product that the buyer either does not want at all or may have preferred to purchase elsewhere on 1-269
different terms. When such ―forcing‖ is present, competition on the merits in the market for the tied item is restrained and the Sherman Act is violated. For a per se violation, the existence of forcing must be probable, and there must be a substantial potential for impact on competition. Here, there was no forcing of patients to purchase the services. Since patients are free to enter a competing hospital and to use another anesthesiologist instead of the firm, no such forcing element is present in this case. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 104 S.Ct. 1551 (1984). D. Mergers and Acquisitions Emphasize: That Section 7 of the Clayton Act makes certain mergers and acquisitions illegal. Specifically, a merger that will substantially lessen competition violates the law. The ways in which one business may acquire another business and the technique in which mergers and acquisitions are accomplished. Mergers are usually classified as horizontal, market extension, vertical, or conglomerate merger. Market concentration is measured using the Herfindahl-Hirschman Index (HHI). Contrast product extension with geographic extension mergers. The Hart-Scott-Rodino Antitrust Improvements Act, 1976 and the need to have a premerger notification. Sidebar 16.6—―Preserving Competition in Pens, Post-Its, and Paper Clips‖ Case for Discussion: 1. American Stores, the fourth largest supermarket chain in California, acquired all of the stock of the largest chain. The state filed suit to stop the acquisition under Section 7 of the Clayton Act. Issue: Can litigants other than the federal government obtain divestitures? Held: Yes. Divestiture is a form of ―injunctive relief‖ authorized by § 16. Note, however, that simply because a district court has the power to order divestiture in appropriate § 16 cases does not mean that it should do so in every situation in which the Government would be entitled to such relief. A private litigant must establish standing by proving ―threatened loss or damage‖ to his or her own interests, and the suit may be barred by equitable defenses such as laches or ―unclear hands.‖ California v. American Stores Company, 110 S.Ct. 1853 (1990). Additional Matters for Discussion: 1-270
The ―incipiency‖ rule and the importance of the potential entrant doctrine. The failing-company doctrine. Note that it is being used more and more to justify mergers and that it is being used before companies actually fail. Also, the doctrine has been applied to failing divisions and failing subsidiaries. That enforcement seems to be relaxed with respect to mergers within the defense industry, the communications industry, and the healthcare industries. Examples of mergers that were disallowed; i.e., General Mills and RJR Nabisco, Microsoft, Intuit, Office Depot and Staples.
V. The Federal Trade Commission Act—Unfair Competition (LO 16-6) Emphasize: That the Wheeler-Lea amendment in 1938 added that ―unfair or deceptive acts or practices in commerce‖ are also unlawful under section 5. What the original Section 5 of the Federal Trade Commission Act states and explain its purpose. That the primary function of the FTC is to prevent illegal business practices rather than punish violations. A. International Antitrust Enforcement Emphasize: The U.S. antitrust laws described earlier apply to companies outside the United States. So long as their activities have a substantial impact on U.S. commerce, foreign companies must comply with U.S. antitrust law. The U.S. antitrust laws apply to companies outside the United States. So long as their activities have a substantial impact on U.S. commerce, foreign companies must comply with U.S. antitrust law. Additional Matter for Discussion: The case of FTC v. Brown Shoe Co., 384 U.S. 316 (1966). This case sets forth the Supreme Court‘s view that § 5 of the FTC Act stands apart from the provisions of the Sherman and Clayton Acts. Sidebar 16.7—―Read It!—The FTC and DOJ Guidelines‖ Case for Discussion: 1.
Toys ―R‖ Us created an express policy to encourage toy manufacturers to limit distribution of toys sold by Toys ―R‖ Us. In particular, this policy restricted sales to warehouse clubs. The FTC brought action and found that the policy violated § 5 of the 1-271
FTC Act in that the policy was an unfair method of competition. Issue: Does Toys ―R‖ Us violate § 5 of the FTC Act through negotiating with manufacturers to abide by the new distribution policy? Held: Yes. Toys ―R‖ Us is creating vertical agreements with manufacturers. These agreements restrict the manufacturers‘ sales in violation of § 1 of the Sherman Act. Through its market power, Toys ―R‖ Us is leading a boycott of the warehouse clubs by the manufacturers. This boycott is illegal per se. Taken together and separately these actions amount to unfair methods of competition in violation of § 5 of the FTC Act. Toys “R” Us, Inc. v. Federal Trade Commission, 221 F.3d 928 (7th Cir. 2000). 2.
The Indiana Federation of Dentists promulgated a ―work rule‖ forbidding its members to submit x-rays to dental insurers in conjunction with claim forms. The Federation‘s membership was small, numbering less than 100, its members highly concentrated in and around three Indiana communities. Issue: Is this an unfair method of competition? Held: Yes. The Federation‘s policy of requiring its members to withhold x-rays amounted to a conspiracy in restraint of trade that was unreasonable and hence unlawful under § 1 of the Sherman Act. The Federation‘s policy had had the actual effect of eliminating such competition among dentists and preventing insurers from obtaining access to x-rays in the desired manner. A rule of reason decision. F.T.C. v. Indiana Federation of Dentists, 106 S.Ct. 2009 (1986).
Answers to Review Questions and Problems
Introduction 1.
Historical Development a. b. c.
The Sherman Act declares illegal restraints of trades and monopolies or attempts to monopolize as being illegal. The Justice Department‘s Antitrust Enforcement Division and the Federal Trade Commission. State attorneys general are authorized to bring civil actions for damages and injunctive relief. 1-272
d.
Yes, usually through triple damages actions and for injunctive relief.
The Sherman Act 2.
Restraint of Trade Yes. These agreements among the orthodontists likely would be found to be unreasonable restraints of competitive pricing. In fact, at least the agreement to charge the $200 initial fee is so unreasonable as to be illegal per se.
3.
Analysis in Antitrust Law a.
b.
The actual language of the Sherman Act makes every agreement that restrains trade illegal. The rule-of-reason analysis clarifies that only unreasonable restraints are to be challenged. When an activity is per se illegal it is presumed to be so anticompetitive that it has to be unreasonable and therefore it may not be necessary to prove an intent.
Types of Cases 4.
Horizontal Price Fixing No. To expel Hillary would be a violation of the Sherman Act since such expulsion would be for the purpose of enforcing an illegal price fixing scheme.
5.
Vertical Price Fixing a.
b.
6.
Vertical minimum-price fixing is permissible under the Colgate Doctrine. The supplier must announce the minimum price its customers can charge, and the supplier must directly enforce this pricing policy. The use of any intermediary in the enforcing program likely will result in a finding of an illegal price fixing arrangements. The courts will use the rule-of-reason analysis when determining the legality of vertical price fixing. This analysis is appropriate since vertical price fixing is not inherently anticompetitive. Such practices might actually increase interbrand competition.
Indirect Price Fixing Yes. This exchange of information is likely to be held as an unreasonably anticompetitive activity. 1-273
7.
Territorial Agreements a. b.
8.
No. The granting of exclusive territories to franchisees may reasonably enhance competition. Any product where the price is relatively low and has ease of availability determines the buying decision. Small electronic appliance products, food items, and beverages are examples where intrabrand competition may need to be limited to increase interbrand competition.
Concerted Activities Not necessarily. If the manufacturers act independently of one another, there is no illegal activity. Note that not all concerted activities are harmful to the public.
9.
Monopoly Yes. Grinnell has monopoly power in the market with 87 percent control if the proper market was chosen. The geographic market is the nation. The product market is central station hazard-detecting systems. The court must consider whether there are ―substitutes‖ that should be considered in determination of market share. None of the substitutes for the accredited central station service meet the interchangeability test. The market power was achieved by unlawful and exclusionary practices that establish the violation. United States v. Grinnell Corporation, 86 S.Ct. 1698 (1966).
10. Sanctions a.
b. c.
A Sherman Act violation is subject to: individuals—10 years imprisonment and/or up to a $1,000,000 fine; corporations—up to a $100,000,000 fine; an injunction; triple damage suits; and/or seizure of property. A finding of guilt or a guilty plea in a criminal case establishes proof of wrong in the civil case The nolo contendere plea does not establish guilt in the criminal case and hence does not offer proof of an antitrust violation in a civil case.
11. Exemptions These operators would use the Noerr-Pennington Doctrine as their defense that they are exempt from the Sherman Act‘s application.
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The Clayton Act 12. Introduction a. b.
Injunctions and triple damage suits are the sanctions provided under the Clayton Act. The Clayton Act was set in place to attack in their incipiency many practices that eventually could destroy competition or create a monopoly. The idea was to remedy these matters before full harm was done.
13. Price Discrimination a. b.
c.
Perhaps, giving a discount to only one customer violates the Robinson-Patman Amendment to the Clayton Act. Other customers‘ claim for triple damages should be your most likely problems. Either these customers or the government could also seek an injunction to stop similar discounts. No, the same offer of the discounted price to all customers removes the price discrimination.
14. Special Arrangements a. b.
No. This exclusive supply contract likely could be justified as a reasonable means of maintaining quality standards. The exclusive nature of the supply contract for paper products and cleaning suppliers is less reasonable. Requiring franchisees to purchase these types of items does not necessarily enhance the franchiser‘s quality image.
15. Mergers and Acquisitions The government‘s best argument is that P&G is a potential entrant in the liquid bleach market. As a potential competitor, P&G should not be allowed to purchase this product position through the acquisition of Clorox. The Federal Trade Commission Act—Unfair Competition 16. Enforcement Yes. The outcome of this case turns on the application of various exemptions from the antitrust laws (which the Supreme Court concludes are not applicable here). However, what is clear is that the case brought by the FTC is entirely within that agency‘s authority under 1-275
Section 5. FTC v. Superior Court Trial Lawyers Assn., 110 S.Ct. 768 (1990). 17. Prevention a.
b.
Any actions that violate the Sherman or Clayton Acts likely could be analyzed as a § 5 violation. Advertising campaigns also may be declared unfair or deceptive. Other activities challenged by the FTC do not have to violate the Sherman and Clayton Acts. Predatory pricing, price fixing and tying agreements are activities the FTC has declared unlawful. No. Section 5 of the FTC Act is independent from both the Sherman and Clayton Acts.
International Antitrust Enforcement 18.
Student answers will vary. But possible solutions are to understand the anti-trust laws in the area in which the company is doing business, and allow for differences (such as advertising space on Google) for differing locations.
Business Discussion 1.
What legal worries do you have about each of these situations? With respect to dividing territories with competitors, one might worry whether this is competitively advantageous. One also should focus on the potential antitrust violation based on a restraint of trade. With respect to the customer requesting a more favorable pricing program, one needs to focus on how to provide any resulting favorable treatment to all customers.
2.
What type of information should a training/education program for your sales force include? Detailed instruction on the Sherman Antitrust Act, the Clayton Act, and the Federal Trade Commission Act should be shared with this sales force. These instructions should include clear examples of proper and improper conduct.
3.
What are the ramifications if you decide to ignore these situations as you try to return to your “happy” state of mind? A violation of the Sherman Antitrust Act could result in criminal penalties of up to $100,000,000 imposed on your company. One personally could face a $1,000,000 fine and up to ten years in prison. There also is the potential of liability arising from civil claims of as 1-276
much as three times the damages proven.
Chapter 17 Financial and Securities Regulations Learning Objectives
This chapter is designed as an introduction to the complex legal area of securities. The student is exposed to the expansive meaning given the term security. Details of the Sarbanes-Oxley Act of 2002 are included as a discussion of the federal government‘s response to the numerous recent corporate scandals, including the passage of the new Dodd-Frank Wall Street Reform and Consumer Protection Act. Furthermore, the student should gain a basic knowledge of the federal laws that regulate the initial issuance and the subsequent sales of securities. Finally, the student is introduced to securities regulation by state governments. When the study of this chapter is completed, the student should realize the technicalities of this subject matter and the need for competent legal advice about any phase of securities regulation.
References
Ali, P. and G. Gregoriou, International Corporate Governance after Sarbanes-Oxley. Wiley Pub. (2006). Banks, E., The Failure of Wall Street: How and Why Wall Street Fails and What Can be Done About It. Palgrave Macmillan (2004). Biegelman, M.T. and J. Bartow, Executive Roadmap to Fraud Prevention and Internal Control: Creating a Culture of Compliance. Wiley Pub. (2006). Bloomenthal, H.S., Going Public Handbook. West Publishing (2003). Geisst, C., Undue Influence: How the Wall Street Elite Put the Financial System at Risk. Wiley Pub. (2005). Green, S., Sarbanes-Oxley and the Board of Directors: Techniques and Best Practices for Corporate Governance. Wiley Pub. (2005). Hazen's Treatise on the Law of Securities Regulation, 7th (Practitioner Treatise Series), Thompson Reuters (2020) Hazen, T., Hazen's The Law of Securities Regulation, 7th ed. . West Publishing (2017). Kleeburg, R., Initial Public Offering. Thomson/Texere (2005). 1-277
Niskanen, W., After Enron: Lessons for Public Policy. Rowman & Littlefield Publishers (2005). Nofsinger, J. and K. Kim, Infectious Greed: Restoring Confidence in America‘s Companies. Financial Times Prentice-Hall (2003). Northrup, C.L., Profitable Sarbanes-Oxley Compliance: Attain Shareholder Value and Bottom-Line Results. J. Ross Pub. (2006). O‘Brien, J., Wall Street on Trial: A Corrupted State? Wiley Pub. (2003). Partnoy, F., Infectious Greed: How Deceit and Risk Corrupted the Financial Markets. H. Holt and Co. (2003). Quarterman, J., Risk Management Solutions for Sarbanes-Oxley Section 404 IT Compliance. Wiley Pub. (2006). Taylor, H., The Joy of SOX: Why Sarbanes-Oxley and Service-Oriented Architecture May Be the Best Thing that Ever Happened to You. Wiley Pub. (2006). Vise, D. and M. Malseed, The Google Story. Delacorte Press (2005). Website: http://www.sec.gov
Teaching Outline
I. Introduction Emphasize: Table 17.1—―Laws Regulating Securities Transactions‖ A. What is a Security? (LO 17-1) Emphasize: That since the objective of securities laws is to protect uninformed people from investing their money without sufficient information, the term security is given a very broad definition. Point out that the definition covers much more than corporate stocks and bonds. That a security involves an investment in a common enterprise with profits to come solely from the efforts of persons other than the investor. Cases for Discussion: 1.
Bankers Trust Company served as an agent for corporate customers by placing their commercial paper for sale. This function of a commercial bank acting as a dealer of commercial paper was challenged by the Securities Industry Association. 1-278
Issue: Were these sales subject to federal securities laws? Held: Yes. The sale of commercial paper is a security and the Glass-Steagall Act prohibits commercial banks from acting as dealers of such securities. Securities Industry Association v. Board of Governors of the Federal Reserve System, 104 S.Ct. 2979 (1984). 2.
W.J. Howey Company and Howey-in-the-Hills Service, Inc., are Florida corporations under common control and management. Howey Company offered to sell to the public its orange grove, tree by tree. Howey-in-the-Hills Service, Inc., offered these buyers a contract wherein the appropriate care, harvesting, and marketing of the oranges would be provided. Most of the buyers who signed the service contracts were nonresidents of Florida who had very little knowledge or skill needed to care for and harvest the oranges. These buyers were attracted by the expectation of profits. When the profits were not forthcoming, the buyers sued based on the 1933 Securities Act registration requirements not being satisfied. Issue: Did the Howey Company sell securities? Held: Yes. Sales of orange trees and services contracts were sales of securities. Under the Federal Securities Act of 1933, a security exists whenever one person invests money in a common enterprise with the exception of profits resulting from the efforts of another person. Upon examination of these orange grove transactions, these essential requirements of a security were found to be present. Since the registration requirements were not satisfied, the controllers of these ―Howey‖ companies have violated the Federal Securities Act of 1933. SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
Additional Matters for Discussion: The following points, which are not discussed in the text, may provide for further discussion—the ―Sale of Business‖ Doctrine and how the Supreme Court has limited its application, the ―Family Resemblance‖ Test, and the exceptions based on the concept of duplicate regulation. Case Examples: 1.
Ivan K. Landreth and his sons sold all their stock in a lumber business to Samuel Dennis and John Bolten. Dennis and Bolten formed the Landreth Timber Company, and they hired Ivan Landreth to continue as a consultant concerning the daily operations of this business. After the business proved to be unsuccessful financially, Dennis and Bolten 1-279
sued Landreth. These plaintiffs claimed their purchase of the timber business could be rescinded since Landreth failed to register the sale of the stock with the SEC. Landreth argued that since all the stock was sold to Dennis and Bolten, the sale of business doctrine exempted the transaction for the federal law. Issue: Does the sale of business doctrine apply in this factual setting? Held: No. This stock has all the characteristics of a security subject to the federal regulations. It is reasonable that Dennis and Bolten would expect the federal laws to apply. Furthermore, Landreth agreed to assist in the daily operations of the business. Landreth Timber Company v. Landreth, 105 S.Ct. 2297 (1985). 2.
The plaintiff alleges that he purchased a 50 percent interest in a company in reliance on financial documents and oral representations. When he began to doubt the accuracy of these representations, he brought an action alleging violations of the 1933 Securities Act and the 1934 Securities Exchange Act. Issue: Does the ―sale of business‖ doctrine exempt this transaction from the securities laws? Held: No. The stock meets the definition of a security, and the ―sale of business‖ doctrine does not apply. The sale of all or part of a business effectuated by the transfer of stock bearing the traditional incidents of stock ownership is subject to the strictures of the federal securities laws. Gould v. Ruefenacht, 105 S.Ct. 2308 (1985).
3.
The Weavers purchased a $50,000 certificate of deposit (CD) from the Marine Bank on February 28, 1978. The Weavers pledged their CD to the Marine Bank as a guarantee of a $65,000 loan the Bank made to Columbus Packing Company. (Although it is not clear what relationship the Weavers had with Columbus, they likely were friends or relatives of the owners of the Columbus Packing Company.) At the time the loan was guaranteed, Columbus already owed the Marine Bank $33,000, and its checking account with the Bank was overdrawn by a substantial amount. None of these facts were revealed to the Weavers prior to their guarantee being made. Issue: Did the Marine Bank violate the antifraud provisions of the federal securities law by not revealing to the Weavers the full financial condition of the Columbus Packing Company? Held: No. This certificate of deposit was issued by a federally regulated bank that was governed by comprehensive regulations. The CD also is insured by the Federal Deposit 1-280
Insurance Corporation. These factors are important differences between a CD and other long-term debt obligations. Therefore, it is held that Congress did not intend for CDs similar to the one the Weavers purchased to be protected by the federal securities laws. Furthermore, the Weavers‘ guarantee of the loan made to Columbus Packing Company did not amount to a security. Such a guarantee under the circumstances of this case does not fall within ―the ordinary concept of a security.‖ Marine Bank v. Weaver, 102 S.Ct. 1220 (1982). (Note: This decision does not preclude the Weavers from seeking damages from the bank on grounds other than securities violations.) 4.
A pension plan entered into under a collective-bargaining agreement between a local labor union and employer trucking firms required all employees to participate in the plan but not to pay anything into it. An employee was required to have twenty years of continuous service in order to be eligible for a pension. Daniel, who had over twenty years of service, was denied a pension upon retirement because of a short break in service. Daniel then brought suit alleging that the union misrepresented and omitted to state material facts with respect to the value of a covered employee‘s interest in the plan. He claimed that this constituted fraud in connection with the sale of a security in violation of Section 10(b) of the Securities Exchange Act of 1934. Issue: Is a noncontributory, compulsory pension plan a ―security‖ within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934? Held: No. To determine whether or not a particular financial relationship constitutes an investment contract, the test is whether or not the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. Employees here make no payment into the pension fund. Moreover, the accepting of employment is not an investment of money because the pension plan investment is a relatively insignificant part of the total indivisible compensation package of the employee. The expectation-of-profits element is not met because although the pension fund to some extent does depend on earnings from its assets, it is insubstantial, and the greater amount comes from employer contributions. The use and terms of employee pension plans are comprehensively governed by ERISA. This rebuts all arguments that the Securities Acts should apply to pension plans. International Brotherhood of Teamsters v. Daniel, 99 S.Ct. 790 (1979).
B. Securities and Exchange Commission Explain: The purpose of creating the Securities and Exchange Commission (SEC). The composition of the SEC. 1-281
That the SEC has both quasi-legislative and quasi-judicial powers.
II. The Securities Act of 1933: Going Public (LO 17-2) Discuss: The nature of the Securities Act of 1933. That this law makes it illegal to use the mails or any other means of interstate communication or transportation to sell securities without disclosing certain financial information to potential investors. A. Parties Regulated Emphasize: The definitions of issuer, underwriter, controlling person, and seller. Explain how each of these parties may become liable under the 1933 Act‘s provisions. The need to be aware of the requirements of the Securities Act of 1933. B. Documents Involved Emphasize: The role of the Securities Act of 1933 in regulating the initial sales of securities. The Securities Act of 1933 is a disclosure law requiring that investors bear furnished information from which they should be able to make intelligent decisions whether or not to purchase a security. The two types of documents the issuer has to show before a securities transaction is consummated. Additional Matters for Discussion: The three stages of the registration process and the selling activities that are permitted during each stage. Why advertising by the issuer during the waiting period must take the form of a ―tombstone ad.‖ Obtain a recent prospectus from a local securities broker and pass it among students. Ask them if they think most investors read and understand prospectuses. Why this 1933 Act does not prohibit sales of worthless securities so long as full disclosure is made. Registration Statement Explain: 1-282
That in an attempt to accomplish its purpose of disclosure, the Securities Act of 1933 contains detailed provisions relating to the registration of securities. These provisions require that a registration statement be filed with the SEC. The terms prefiling period, waiting period, and tombstone ads.
Prospectus Explain: That a prospectus must be furnished to any interested investor, and it must conform to the statutory requirements. The contents of a prospectus form. The statutory notification written in uppercase on the prospectus form. The importance of Rule 144A. C. Liability Emphasize: The maximum criminal sanctions for violating the 1933 Act are 5 years in prison or $10,000 fine or any combination of the two. Civil liability under the 1933 Act usually involves a buyer of securities suing for a refund of the investment. That this section of the text involves three sections of the 1933 Act that directly apply to civil liability of parties involved in issuing securities. Section 11: Registration Statement Explain: The various persons on whom a liability is imposed in favor of purchasers of securities. The three situations of the registration process that can be used to hold the persons responsible. That a plaintiff-purchaser need not prove reliance on the registration statement in order to recover the amount of an investment. That a defendant can defend the suit by proving actual knowledge of the falsity by the purchaser. Knowledge of the falsity by a defendant need not be proved. Section 12: Prospectus and Other Communications Explain: The two sections of the 1933 Act. How each subsection of Section 12 imposes 1-283
liability on individuals. That if the purchaser still owns the securities and he or she can prove a direct contractual relationship with the seller, the remedy of rescission and a refund of the purchase price is also available.
Section 17: Fraudulent Transactions Emphasize: That the significance of Section 17 in the sale of securities. Reasons why proving a scienter under Section 17 has raised controversies and how the Supreme Court resolved the issue. Additional Matters for Discussion: The name of Section 12(2), as the name suggests, involves false or misleading documents. The importance of scienter in Section 17(a) cases. The reasons for imposing criminal liability on lawyers and accountants. Refer particularly interested students to Section 24 of the 1933 Securities Act, 15 U.S.C.A. Section 77x. Cases for Discussion: 1.
The shareholders of Alloyd, Inc. sold their stock in a private sale agreement. The contract specified a price for the estimated increased value in the company‘s worth between the time of sale and the end-of-the-year audited financial statements. The contract further provided that any party disappointed with estimated value could seek an adjustment after the financial records were audited. The buyers were disappointed with the estimated increased value. Rather than seeking an adjustment in the purchase price, they sought to rescind their purchase under § 12(2) claiming that the information provided (as a prospectus) at the time of the sale was false or misleading. Issue: Does § 12(2) apply to private sale contracts? Held: No. When the 1933 Act was enacted, the term prospectus was well understood to refer to documents soliciting the public to acquire securities from the issuer. Section 12(2) does not extend to a private sale contract since that contract is not held out to the public as a ―prospectus‖ in the meaning of the 1933 Act. Gustafson v. Alloyd Co., Inc., 115 S.Ct. 1061 (1995).
2.
Billy Pinter is an oil and gas producer and a registered securities agent in Texas. 1-284
Maurice Dahl is an investor from California. Desiring to invest in oil and gas leases, Dahl was introduced to Pinter. After Dahl invested at least $20,000 with Pinter, Dahl assisted fellow investors in completing a subscription-agreement form prepared by Pinter. When these investments became worthless, Dahl and others sued Pinter. They sought to rescind their investments claiming that the purchased securities were not registered under Section 12(1) of the 1933 Securities Act. Pinter asserted the defense of in pari delicto on the grounds that Dahl was at least equally at fault for the securities not being registered. Dahl and the other plaintiffs contend that Section 12(1) imposes a strict liability standard on Pinter; therefore, the in pari delicto defense is not available. Issue: In a Section 12(1)—failure to register securities—case, may a defendant effectively raise the defense of in pari delicto? Held: Yes. The equitable defense of in pari delicto, which literally means ―in equal fault,‖ is rooted in the common law notion that a plaintiff‘s recovery may be barred by his or her own wrongful conduct. The primary purpose of the 1933 Securities Act is to protect investors by requiring disclosure of material information thought necessary to allow them to make informed investment decisions. With respect to failing to register securities, unless the degrees of fault are essentially indistinguishable or the plaintiff‘s responsibility is clearly greater, the in pari delicto defense should not be allowed. Where the Section 12(1) plaintiff is primarily an investor, precluding suit would interfere significantly with effective enforcement of the securities law. However, if the plaintiff is more of a promoter than an investor, the in pari delicto defeat may be used to deny the plaintiff‘s recovery. The Court concluded that the trial court needed to make factual findings concerning the role of Dahl and the other investors. Pinter v. Dahl, 113 S.Ct. 927 (1993). 3.
Two securities brokers, as employees of a broker-dealer firm, produced false information about the Lawn-A-Mat Chemical & Equipment Corporation. This false information was given to potential investors to induce the purchase of Lawn-A-Mat stock. Evidence of these brokers‘ wrongful actions was given to their supervisor, Peter Aaron. When he did nothing to prevent further distribution of false information, the SEC sought to enjoin Aaron from aiding and abetting continuous violations of Section 17(a) of the Federal Securities Act of 1933. Issue: Is the SEC required to establish scienter as an element of a civil enforcement action to enjoin violations of Section 17(a) of the 1933 Act? Held: Yes, under Section 17(a)(1). No, under Section 17(a)(2) and Section 17(a)(3). 1-285
Scienter is an element of a violation of Section 17(a)(1) of the 1933 Act, which makes it unlawful to employ any device, scheme, or artifice to defraud. Scienter is not an element of a violation of Section 17(a)(2) of the 1933 Act, which prohibits any person from obtaining money or property by means of any untrue statement of material fact or any omission to state a material fact. Scienter is not an element of a violation of Section 17(a)(3) of the 1933 Act, which makes it unlawful for any person to engage in any transaction, practice, or course of business that operates or would operate as a fraud or deceit. Aaron v. Securities and Exchange Commission, 100 S.Ct. 1945 (1980). 4.
The respondent engaged in a fraudulent ―short selling‖ scheme by placing orders with brokers to sell certain shares of stock that he falsely represented that he owned. The price of the stock rose sharply before the delivery date so that respondent was unable to make covering purchases and never delivered the securities. Consequently, the brokers had to buy replacement shares on the open market in order to deliver shares to investor-purchasers and the brokers suffered substantial financial losses. Naftalin was convicted of violating Section 17(a) of the Securities Act of 1933 by using a scheme and artifice to defraud in the sale of securities. Issue: Does Section 17(a)(1) of the Securities Act of 1933 prohibit frauds against brokers as well as investors? Held: Yes. Nothing on the face of the statute indicates that it applies solely to frauds directed against investors. The language only requires that the fraud occur ―in‖ an ―offer or sale‖ of securities. The statute is designed to ensure a high standard of business ethics and to protect honest businesspeople. Frauds against brokers do eventually harm investors indirectly by increasing the cost of doing business to brokers, which is passed on to consumers. United States v. Naftalin, 99 S.Ct. 2077 (1979).
D. Defenses Emphasize: The major types of defenses used to avoid civil liability, recognized by the Securities Act of 1933. The three most important defenses are materiality, statute of limitations, and due diligence. Materiality Emphasize: 1-286
That a defendant in a case involving the 1933 Act might argue that the false or misleading information is not material and thus should not have had an impact on the purchaser‘s decision-making process.
Statute of Limitation Emphasize: That the statute of limitations is a defense for both civil and criminal liability. That the basic period is one year. The one year does not start to run until the discovery of the untrue statement or omission. Due Diligence Emphasize: That a very important defense for experts such as accountants is the due diligence defense. How a due diligence defense is established. Additional Matters for Discussion: For review, see Concept Summary: Liability under the Securities Act of 1933. III. Securities Exchange Act of 1934: Being Public (LO 17-3) Explain: The role of Securities Exchange Act of 1934 as against that of Securities Exchange Act of 1933. That the 1934 Act, which created the Securities and Exchange Commission, also deals with regulation of securities exchanges, brokers, and dealers in securities. A. Section 10(b) and Rule 10b-5 Emphasize: That most of the litigation under the Securities and Exchange Act of 1934 is brought under Section 10(b) of the act and Rule 10b-5 promulgated by the SEC pursuant to the act. The clauses stated in Section 10(b) and Rule 10b-5. The common issues included in Section 10(b) and Rule 10b-5. Sidebar 17.1—―Language of Section 10(b) of the 1934 Act and the SEC‘s Rule 10b-5‖ Liability (LO 17-4) 1-287
Emphasize: That there is a limited answer to the question who is liable. Case 17.1—―Lorenzo v. Securities Exchange Commission.‖ Damages Emphasize: That a plaintiff in a suit under Rule 10b-5 must prove damages. That neither punitive damages nor attorney‘s fees are recoverable in Section 10(b) and Rule 10b-5 litigation. Sidebar 17.2—―Proof of Loss Due to Fraud‖ Sidebar 17.3—―Right to Contribution from Others‖ Materiality Emphasize: That Section 10(b) and Rule 10b-5 are usually referred to as the antifraud provisions of the act. That materiality under the 1934 Act is the same as materiality under the 1933 Act. How Section 10(b) interprets fraud. Some difficult issues concerning materiality that affect mergers. Sidebar 17.4—―Statue of Limitations for Fraud Claims‖ Additional Matter for Discussion: A plaintiff alleging damages due to misrepresentations in a registration statement and prospectus may pursue remedies under Section 10(b) and Rule 10b-5 notwithstanding that Section 11 of the 1933 Securities Act provides express relief for misrepresentations in a registration statement or a prospectus. See Herman & MacLean v. Huddleston, 103 S.Ct. 683 (1983). Case for Discussion: 1.
Basic Incorporated manufactured chemical refractories for the steel industry. Beginning in September 1976, Combustion Engineering, Inc., held meetings with officers of Basic, Inc., about the possibilities of a merger. During 1977 and 1978, Basic made three public statements denying that it was engaged in merger negotiations. On December 18, 1978, Basic asked the New York Stock Exchange to suspend trading in its shares and issued a release stating that it had been ―approached‖ by another company concerning a merger. On December 19, Basic‘s 1-288
board endorsed Combustion‘s offer of $46 per share for its common stock. On the following day, Basic publicly announced its approval of Combustion‘s tender offer for all outstanding shares. Former shareholders of Basic, Inc., who sold their stock after the first public statement filed a suit for damages arguing that Basic, Inc., and its directors issued false or misleading statements in violation of Section 10(b) of the 1934 Exchange Act and Rule 10b-5. The defendants argued that announcements about a possible, but uncertain, merger could not be material as defined by the statute. Issue: Do Section 10(b) and Rule 10b-5 requirements of materiality apply to preliminary corporate merger discussions? Held: Yes. The fundamental purpose of the 1934 Act is supported by a philosophy of full disclosure. There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the marketplace thrive upon mystery and secrecy. Materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. Because a merger, when completed, results in the death of one or more corporations, the inside information about this possible event becomes material at an earlier stage than would be the case with information about less significant transactions. This earlier stage of materiality occurs even though the likelihood of a completed merger is small. Whether merger discussions in any particular case are material depends on the facts. However, no particular event or factor need be necessary or sufficient by itself to render merger discussions material. Basic Incorporated v. Levinson, 108 S.Ct. 978 (1988). International Application Emphasize: The application of §10(b) and Rule 10b-5 to international securities transactions appears to depend on the nationality of the purchaser and seller. May also depend on where the transaction takes place. Case 17-2—―Morrison v. National Australia Bank LTD‖
B. Insider Transactions Explain: The definition of the term insider. SEC requirements of an insider‘s properties. 1-289
The concept of short-swing profits. How profits are calculated. The reporting requirement of insiders.
Additional Matters for Discussion: The application of the law to short-swing profits and how it does not matter whether the purchase or the sale of securities occurs first. Ask students to provide examples of nonpublic information that may be very valuable to an insider who deals in a company‘s securities. C. Nonpublic Information Emphasize: The distinction between insider transactions under Section 16 and non-insiders improperly using nonpublic information. This latter situation may give rise to a suit under Section 10(b) and Rule 10b-5. Section 10(b) has been used to protect investors from those non-insiders who use nonpublic information in order to manipulate securities transactions for private gain (tippee liability and misappropriation theory). Case 17.3—―United States v. O‘Hagan‖ The Insider Trading and Securities Fraud Enforcement Act of 1988. Cases for Discussion: 1.
Dirks, an investment analyst for a brokerage firm, discovered from a former officer of an insurance company that the company‘s assets were overstated due to fraudulent accounting practices. During his investigation, Dirks personally dealt in the insurance company‘s securities. However, he talked about his investigation with his investing clients. These clients sold their interests before the fraud was publicly announced and before the insurance company‘s securities declined in value. The SEC found that Dirks had violated Section 10(b) because he, as a tippee, failed to disclose the information gained from an insider to the public before that information was used to profit in trading. The court of appeals affirmed the SEC‘s findings and censure of Dirks. The U.S. Supreme Court granted certiorari. Issue: Was Dirks subject to the 1934 Act? Held: No. After reviewing its recent decision in Chiarella, the Supreme Court reiterated that not all uses of insider information violate the securities laws. Indeed, a tippee (in Dirks‘s position) assumes a fiduciary duty to the shareholders of a corporation not to 1-290
trade on material nonpublic information only when the insider (the former officer of the insurance company) has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows, or should know, that there had been a breach. In determining whether or not a tippee is under an obligation to disclose or abstain, it thus is necessary to determine whether or not the insider‘s ―tip‖ constituted a breach of the insider‘s fiduciary duty. Whether or not disclosure is a breach of duty therefore depends largely on the purpose of the insider‘s disclosure. The test to be used is whether or not the insider personally will benefit, directly or indirectly, from his disclosure. If there is no attempt to achieve a personal gain, there has been no breach of duty to the stockholders. And absent a breach by the insider, there can be no derivative breach by the tippee. The former officer of the insurance company disclosed the insider information in order to reveal the company‘s fraudulent practices; he never intended to and he did not receive any monetary or personal gain. Since this insider did not breach a fiduciary duty, Dirks could not have participated in ―passing-on‖ the insider‘s breach of a fiduciary duty. Therefore, the SEC‘s and appellate court‘s decisions are reversed. Dirks v. S.E.C., 103 S.Ct. 3255 (1983). 2.
A financial printer has been hired by certain corporations to print corporate-takeover bids. Chiarella, an employee of the printer, was able to deduce the identities of both the acquiring companies and the companies that were targeted for takeover. Without disclosing the knowledge about the prospective takeover bids, Chiarella purchased stock in the target companies and then sold his purchased shares for a profit immediately after the takeover attempts were made public. After the SEC began an investigation, Chiarella entered into a consent decree in which he agreed to return the profits he had made as a result of his activities. Thereafter, Chiarella was indicted for violating Section 10(b) of the Federal Securities Exchange Act of 1934 and Rule 10b-5. Chiarella was convicted, and his conviction was affirmed by the Second Circuit Court of Appeals. Issue: Was Chiarella subject to the 1934 Act? Held: No. Reversed. The element required to make silence fraudulent—a duty to disclose—is absent in this case. No duty could arise from Chiarella‘s relationship with the sellers of the target company‘s securities, for he had no prior dealings with them. Chiarella was not their agent; he was not a fiduciary; he was not a person in whom the sellers had placed their trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only through impersonal market transactions. Chiarella v. United States, 100 S.Ct. 1108 (1980).
Additional Matters for Discussion: The SEC has implemented the computerized Market Oversight and Surveillance System 1-291
(MOSS) to help locate market irregularities that may indicate trading with nonpublic information. That there is a dispute as to whether or not trading with nonpublic information hurts markets. Are small investors worth protecting? The Ivan Boesky, Drexel Burnham Lambert, Inc., and Michael Milken cases. Were their punishments appropriate?
D. Additional Civil Liability Emphasize: The Securities Enforcement Remedies Act of 1990 and the increased civil sanctions. The purpose of Section 18 of the 1934 Act. The distinctions between this section of the 1934 Act and Sections 11 and 12 of the 1933 Act. Additional Matter for Discussion Comparison of Section 18 of the 1934 Act and Sections 11 and 12 of the 1933 Act. E. Criminal Liability Emphasize: The possible criminal sanctions under the 1934 Act. The increased criminal sanctions for those guilty of insider trading. The penalties imposed upon violating organizations and individuals.
IV. Other Considerations A. Private Securities Litigation Reform Act of 1995 Emphasize: Any allegation of intentional wrongdoing by a company or executive must be very specifically stated in the private party‘s complaint. The purpose of enacting the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The limitation on damages that a private party can recover and restriction on attorneys fee that can be collected. Case 17.4—―Halliburton co. V. Erica P. John fund, Inc.‖ Additional Matter for Discussion: 1-292
Table 17.2—―Number of Federal Securities Fraud Class Actions (filed each year)‖
B. State Blue Sky Laws (LO 17-5) Emphasize: The term blue sky laws. The various applications of blue sky laws and their relation to federal regulations. The reason for the enactment of the Uniform Securities Act, 1956. Registration Requirements Emphasize: The various registration techniques used by the states. The difference between registration by notification and registration by qualification. Exemptions Emphasize: The four major exemptions from blue sky laws that have been identified. The various exemptions by giving examples of each. Additional Matters for Discussion: The type of law enacted in each state and any exemptions provided by the law. The example at the end of the section on ―any 12-month period.‖ V. Sarbanes-Oxley Act of 2002 (LO 17-6) Explain: Events that resulted in the enactment of this law. The coverage of the law. A. Revitalization of SEC Emphasize: The main function of the Sarbanes-Oxley Act of 2002. The history of corruption related to corporations such as Enron, WorldCom, Tyco, Adelphi, Health South, and Arthur Andersen. The proposed increase in the SEC‘s budget and how this has become a battleground issue between Congress and the President Bush‘s government.
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Additional Matters for Discussion: Actions by the SEC concerning executive compensation disclosures. The trend toward utilizing the internet to assist shareholders with gaining access to corporate information and communicating with the corporate officials. B. Accounting Reforms Emphasize: The role of the Public Company Accounting Oversight Board (PCAOB). The organizational structure of the PCAOB within the SEC as opposed to it being an independent agency. Additional Matters for Discussion: The requirement that auditing firms not engage in nonauditing services and how this impacts consulting businesses formerly run by accounting firms. Any news items that reflect on the effectiveness and efficiency of the PCAOB. C. Corporate Governance Emphasize: The importance of this part of Sarbanes-Oxley as being the law‘s lasting contribution. That Sarbanes-Oxley focuses on increasing the independence of the auditors. The requirement of at least one member with knowledge of GAAP. The reporting lines of the auditor to the audit committee to maintain independence from the chief financial officer and the corporate accounting staff. That public companies must have audit, compensation, and nominating committees that include only independent directors. Additional Matter for Discussion: The requirement that the audit partner of the external auditing firm must rotate off the audit engagement at least every five years. D. Financial Statements and Controls Emphasize: Sections 302 and 404 of the Sarbanes-Oxley. Evidence that Sarbanes-Oxley is having a positive impact. On additional provisions of the Sarbanes-Oxley Act. Additional Matter for Discussion: 1-294
How Sarbanes-Oxley simultaneously adds to and helps control the financial difficulties that resulted in the Emergency Economic Stabilization Act of 2008.
E. Whistleblower Protection Emphasize: The role of the Sarbanes-Oxley Act in protecting whistleblowers. Reinstatement of whistleblowers. Sidebar 17.5—―Extending Whistleblower Protection‖ VI. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (LO 17-7) Emphasize: That this is a massive bill that addresses a large number of reform issues. That numerous new administrative organizations were created to oversee the reforms. That it will take several years to realize the many results of the reforms addressed. Table 17.3—―Major Provisions of Dodd-Frank Wall Street Reform and Consumer Protection Act‖ List some of the new agencies brought in to bring in financial reform. Sidebar 17.6—―CFPB Files Brief Addressing Spokeo v. Robins Petition‖ VII. Jumpstart Our Business Startups (JOBS) Act 2012 Emphasize: That this is a provision meant to help smaller businesses find the necessary capital to grow. That the goals of the JOBS Act are to ease burdensome federal regulations and allow individuals to invest in start-ups through relaxed rules for some initial public offerings.
Answers to Review Questions and Problems
Introduction
1.
What Is a Security? Yes. Under the Federal Securities Act of 1933, a security exists whenever one person invests money in a common enterprise with the exception of profits resulting from the efforts of 1-295
another person. Upon examination of these orange-grove transactions, these essential requirements of a security were found to be present. Therefore, these sales of land and service contracts, when taken together, were subject to the registration requirements of the 1933 Act. Since these registration requirements were not satisfied, the controllers of these Howey companies have violated the Federal Securities Act of 1933. Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293 (1946). 2.
Securities and Exchange Commission a. b.
This administrative agency was created in 1934 through the Securities Exchange Act of 1934. The SEC has both quasi-legislative and quasi-judicial authorities.
The Securities Act of 1933: Going Public 3.
Parties Regulated The four parties regulated by the 1933 Securities Act are issuers, controlling persons, underwriters, and sellers.
4.
Documents Involved a. b.
5.
The registration statement and the prospectus are the two documents required by the 1933 Act. The three time periods are known as the (1) pre-filing period, (2) waiting period, and (3) post-effective period. During the pre-filing period, the security cannot be offered for sale. During the waiting period, the security cannot be sold, but offers to buy or sell may be made. These offers cannot be accepted until during the post-effective period when the security can be sold.
Liability No. ―Sale‖ or ―sell‖ includes every contract of sale or disposition of a security for value. ―Offer‖ includes every attempt or offer to dispose of, a solicitation of an offer to buy, or a security or interest in a security for value. Obtaining a loan secured by a pledge of stock unmistakably involves a ―disposition of... interest in a security, for value.‖ Although pledges transfer less than absolute title, the interest thus transferred nonetheless is an ―interest‖ in a security. It is not essential under the terms of the act that full title pass to a transferee for the transaction to be an ―offer‖ or a ―sale.‖ Rubin v. United States, 101 S.Ct. 698 (1981).
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6.
Defenses Possible defenses include (1) arguing the information relied on was not important enough to be material, (2) asserting the lawsuit is so old it is beyond the 1 year/3 year statute of limitations, or (3) claiming due diligence was exercised and no false or misleading documentation was uncovered.
Securities Exchange Act of 1934: Being Public
7.
Section 10(b) and Rule 10b-5 a.
b.
8.
Section 10(b) and Rule 10b-5 declare that it is unlawful to use the mails or any other instrumentality of interstate commerce or any national securities exchange to defraud any person in connection with the purchase or sale of any security. The U.S. Supreme Court has held that a fraudulent oral promise can be the basis of finding a violation of § 10(b) of the 1934 Securities Exchange Act and the accompanying Rule 10b-5. A company (Wharf Holdings Limited) attempted to secure legal rights to operate a cable system in Hong Kong. This company contracted with another company (United International Holdings, Inc.) for expert advice on the application, financing, contract negotiation, and financing of the Hong Kong cable system. In return for this service, a managing director of Wharf made an oral promise to United personnel that United would have the option to purchase 10% of the stock of the new cable company. When United was denied the right to purchase this 10% of the cable company, it sued Wharf for damages. A federal district court in Colorado awarded United $67 million in compensatory damages and $58.5 million in punitive damages. The basis of this suit was Wharf‘s managing director‘s fraudulent promise in connection with the purchase of a security. The 10th Circuit Court of Appeals and the U.S. Supreme Court affirmed the court‘s findings and damage awards. The Supreme Court concluded that the evidence introduced during the trial demonstrated Wharf never intended to allow United to purchase 10% of the company‘s stock. This oral promise is the basis of the fraud in connection with the purchase of a security and thus the violation of § 10(b) and Rule 10b-5. Wharf (Holdings) Limited v. United International Holdings, Inc., 121 S.Ct. 1776 (2001).
Insider Transactions Yes, Donna has violated Section 16 of the 1934 Securities Exchange Act because as an insider she has gained a profit of $325 during a six-month period. Emphasize that the 1-297
provision on short-swing profits is applicable whether or not a sale follows a purchase, or vice versa as in this case. Donna is liable for the civil penalty of three times her illegal profits. She also is subject to the criminal sanctions of ten years in jail plus a fine of up to $1,000,000. 9.
Nonpublic Information Information is ―material‖ if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. From an ethical viewpoint, any doubts about materiality of inside information should be resolved in favor of the information being material.
10. Additional Civil Liability Section 18 of the 1934 Securities Exchange Act provides for civil liability related to damages caused by filing false or misleading documents. 11. Criminal Liability The Sarbanes-Oxley Act of 2002 increases criminal penalties for fraudulent securities transactions. The new (increased) penalties for filing false or misleading documents are $5,000,000 fines or 20 years in prison or both for an individual and up to a $25,000,000 fine for an organization. An individual found guilty of fraudulent securities transactions can be imprisoned for up to 25 years.
Other Considerations
12. Private Securities Litigation Reform Act of 1995 a. b.
Congress passed this law to ensure that private parties cannot sue third parties involved in securities law violations. Such action is left to the SEC. Congress attempts to reduce nuisance filings by (1) requiring plaintiffs to plead specific allegations of wrongdoing, (2) limiting plaintiffs‘ damages, (3) restricting the amount of attorney fees that can be recovered, and (4) requiring the appointment of a lead plaintiff in class-action suits.
13. State Blue Sky Laws Businesspeople must understand that in addition to federal securities laws and SEC 1-298
regulations, compliance with state securities laws is necessary to avoid potential civil and criminal liability.
Sarbanes-Oxley Act of 2002
14. Revitalization of SEC The primary method of revitalizing the SEC was a large budget increase. This financial support permits the SEC to enhance its investigative and enforcement staff. Other ways the SEC‘s authority increased was through the creation of the Public Company Accounting Oversight Board and its work to ensure auditors do their work in the interest of protecting public investors. 15. Accounting Reforms The PCAOB requires accounting firms to separate their auditing functions from their consulting services. Also, auditors are not allowed to perform various nonauditing functions, such as bookkeeping, systems design, appraisals and other valuations, actuarial services, human resources functions, and investment banking. 16. Corporate Governance Due to the requirements of the Sarbanes-Oxley Act, independence is now part of several aspects of how a public company operates. First, all members of the company‘s audit committee must be independent of the company‘s management. The CFO no longer can control the work of the audit committee. Second, through its regulations, the SEC requires that a majority of the directors be independent. Third, the auditor reports to the audit committee not to the directors or company executives. Fourth, at least one member of the audit committee must be a financial expert. Finally, any audit partner must rotate off the engagement after five years. 17. Financial Statements and Controls Section 302 requires the CEO and CFO to certify the accuracy of quarterly and annual financial statements filed with the SEC. More significantly, section 404 requires these officers to certify the existence of internal financial controls. Both the financial statements and internal controls are subject to audits. The section 404 certification costs have been higher than Congress likely envisioned. Although most businesspeople seem to applaud the requirements of section 404, there is some anticipation that Congress may reduce, or even 1-299
eliminate, the certification of internal financial controls. 18. Whistleblower Protections Beyond reinvigorating the SEC, the Sarbanes-Oxley increased the criminal penalty for securities fraud, lengthened the statute of limitations in civil cases, and created the crime of conspiracy to commit securities fraud. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 19. The banking and financial crisis that nearly collapsed the United States economy in the autumn of 2008 and the lingering adverse impact throughout 2009 Jumpstart Our Business Startups (JOBS) Act of 2012 20. One new way that new businesses can finance is through crowdfunding. This allows these businesses to raise small amounts of investment dollars from many people, using the Internet to spread the investment opportunity.
Business Discussion #1
1.
Can the three of you just begin advertising for investors? No. As discussed throughout the first portion of this chapter, securities laws require specific disclosures prior to securities being sold to the general public.
2.
What steps must be followed to comply with the law? A registration statement must be filed with the Securities and Exchange Commission if federal regulations must be met, a prospectus must be prepared and made available to potential investors, and requirements of applicable state ―blue sky‖ laws must be satisfied.
3.
How much time is needed before potential investors can be approached legally? This answer depends on how long it takes to prepare and file the registration statement. After this filing is completed, a twenty day waiting period is imposed before contracts to sell securities to investors can be finalized.
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Business Discussion #2
1.
What concerns should you have regarding these conversations? Conversations with friends, customers, and clients about investing in a company‘s stock offerings may lead to violations of securities law. You need to make certain that you have sought legal advice (and are following such advice) prior to these conversations.
2.
Is there anything about your expectations of the company’s future performance you must or must not share? Full and accurate disclosure to potential investors of the required financial aspects and the leadership of your organization are required to avoid the liability for failing to comply with securities laws and regulations.
Business Discussion #3
1.
What requirements of the Sarbanes-Oxley Act will you have to meet? As a publicly-held corporation, the provisions of Sarbanes-Oxley impacts corporate governance. Among these requirements are the make-up of the corporation‘s audit committee, the certification of financial statements, and the certification that internal financial controls are in place.
2.
What is involved in offering a new company’s stock for sale to the public? Compliance with the 1933 Securities Act requires the filing of a registration statement with the SEC and the preparation of a prospectus for delivery to potential investors. Also, compliance with all applicable state blue-sky laws is essential.
3.
Are there aspects of doing business as a publicly traded company that are different from operating as a partnership? Yes! A corporation must be properly registered in every state in which it does business. The division of control among shareholders, directors, and officers of a corporation is very different from the control exercised by partners. Transfer of ownership among shareholders does not impact a corporation the way a change in partner impacts a partnership. Finally the 1-301
degree of federal regulation of the organization is greater with a corporation, through the securities laws covered in this chapter.
Chapter 18 Privacy and Consumer Protection Learning Objectives The objectives of this chapter include understanding what a consumer is and how consumer protection fits into the property-based legal system. Students should understand that at the federal level the principal consumer protection comes from the Federal Trade Commission, but that politics influenced this mission. Students should also grasp the provisions of various consumer and financial protection laws concerning lending, credit reporting protection, and debt collection.
References
Pridgen, Dee D. and Marsh, Gene A., Consumer Protection in a Nutshell 4th ed., West Publishing Company, (2016). Vulkowich, William T., Consumer Protection in the 21st Century: A Global Perspective, Transnational Publishers (2002). Alderman, Richard M., et al., Consumer Protection and the Law, 2019-20 ed., Thompson Reuters (2019). Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Law & Explanation. CCH (2005). Jasper, Margaret, Consumer Rights & the Law (Oceana‘s Legal Almanac Series: Law for the Layperson), Oxford University Press (2007).
Teaching Outline I. Introduction A. Emphasize Most consumer protection laws give consumers a type of private property regarding how goods and services are transferred by sellers through contract law. The legal fence that protects people and the fact that they must respect the rights of 1-302
others. Likewise, in transferring ownership of something we own, we cannot sell it through fraud, sometimes called intentional misrepresentation or deception. That consumer protection laws arise when legislatures define ambiguous legal boundaries between persons.
II. The Federal Trade Commission Emphasize: That the Federal Trade Commission (FTC) is the primary federal agency that protects consumers. Other agencies on the state and federal level, such as the Consumer Financial Protection Bureau. A. The FTC and Trade Practice Regulation (LO 18-1) Emphasize: That the FTC engages in trade practice regulation, which prevents those who would deceive consumers from diverting trade from those who compete honestly. How the FTC protects consumers directly by regulating ―unfair or deceptive trade practices.‖ The FTC issues advisory opinions on a specific business‘ practice and sometimes industry guides that specify the Commission‘s view of the legality of a particular industry‘s trade practices. The FTC pursues cases brought against specific businesses and also issues rules like the one establishing the national do not call list. These rules establish what constitutes unfair or deceptive trade practices. That as with other regulatory agencies, the Commission issues both consent orders and cease and desist orders. Table 18.1—―Selected Laws Administered by the FTC‖ B. FTC Penalties and Remedies Civil Fines Emphasize: The basic penalty for trade practice violations under the FTC Act was a civil fine of not more than $40,000 per violation in 2016. This adjusts for inflation; in 2019 it was $42,350. That fines may be assessed in three distinct situations: for a violation of a consent or 1-303
cease and desist order, for a violation of a trade regulation rule, and for a knowing violation of prior FTC orders against others. Other Remedies Emphasize: The broad powers of the FTC to protect customers in trade regulation cases. How the Federal Trade Commission may return to a wider use of corrective advertising. On the circumstances under which the FTC can offer other remedies, and, the types of remedies it so offers. The various remedies of the FTC other than fines and corrective advertising. Sidebar 18.1—―When Clean Diesel Isn‘t so Clean‖ C. Politics, Economics, and the Law: The FTC Today Emphasize: How discretionary is the statutory enforcement by regulatory agencies. How enforcement views of FTC commissioners often reflect the views of the president who appointed them. How open-ended authority granted to the FTC by the Congress, that is, to determine the regulation of trade practices that are ―unfair‖ or ―deceptive‖ creates the opportunity to impose legal remedies like corrective advertising.
II. Privacy (LO 18-2) Emphasize: Consumers‘ expectation of maintaining basic control over their private information. How firms can make advertising more relevant, personalize web searches, and help connect social and work groups. A. Limitations on Government Intrusions Explain: The limitations of the privacy clause mentioned in the constitution. The role of the Fourth Amendment in regulating consumer privacy. How one of the chief threats to individual privacy comes from the government. The Privacy Act of 1974 and the Right to Financial Privacy Act of 1978. Case 18.1—―Carpenter v. United States, 138 S.Ct. 2206 (2018)‖ 1-304
B. Traditional Business Privacy Emphasize: That the there are two basic common-law privacy torts that arise in consumer transactions. How the Health Insurance Portability and Accountability Act (HIPAA) of 1996 provides for privacy of medical records. C. Electronic and Online Privacy Protection Explain: The need to have additional protection from unwanted intrusions. The enactment of the Electronic Communications Privacy Act (ECPA) as an update to the Wiretap Act. Why children require special protection in the online world, and the Children‘s Online Privacy Protection Act (COPPA). Figure 18.1—―Legal analysis of private-party capture of electronic communications‖ D. State and International Privacy Protection Discuss: How California has taken the lead in state action for privacy protection with the California Consumer Privacy Act of 2018. How in 1995, the European Parliament passed the Data Protection Directive, which mandates that companies may collect personal information only with consent, keep it only as long as necessary, and transfer to third parties only with permission. The importance of the ―safe harbor‖ framework in regulating online data exchange. Which kinds of information about people online should be protected as private and which kinds of information should be freely available to businesses wishing to use them for marketing purposes. Sidebar 18.2—―Exchanging Privacy for Protection During A Crisis‖ Sidebar 18.3—―The Long Reach of the GDPR‖ E. False Advertising (LO 18-3) Emphasize: The reasons for advertising being the most important area of consumer protection. The role of the FTC in regulating false advertising. 1-305
The nature of false advertising and the implications it has on a ―reasonable customer.‖ How nondisclosure can create deceptive advertising. The role of the Lanham Act in misleading advertising claims. Case 18.2—―Lexmark International, Inc. v. Static Control Components, Inc, 572 U.S. 118 (2014)‖ Table 18.2—―Comparison of Common Law Fraud and False Advertising Elements‖ Table 18.3—―Typical FTC Deception Cases‖
IV. Federal Credit Regulations Emphasize: That in addition to the FTC act, the FTC administers other consumer protection statutes as well. That several of these statutes concern credit regulation because the extension of credit is such an important economic reality of our consumer society. A. Equal Credit Opportunity Act (LO 18-4) Emphasize: The ECOA‘s purpose is to prevent discrimination in credit extension. ECOA Prohibitions Explain: That this act prohibits discrimination based on sex, marital status, race, color, age, religion, national origin, or receipt of welfare in any aspect of a consumer credit transaction. It is administered by the FTC. That the ECOA applies to all businesses which regularly extend credit, including financial institutions, retail stores, credit card issuers, automobile dealers, real estate brokers, and others. Responsibilities of the Credit Extender Explain: That basically, the credit extender must consider all sources of regular income in determining whether it is likely that someone applying for credit can repay a debt. Information on accounts used by both spouses must be reported to third parties, such as credit reporting agencies, in the names of both spouses. How, to date, much of the litigation surrounding the ECOA concerns the 1-306
requirements that specific reasons be given a consumer who is denied credit. ECOA Remedies and Penalties Emphasize: That private remedies for violation of the act include recovery of actual damages, punitive damages of up to $10,000, plus attorneys‘ fees and legal costs. Actual damages can include recovery or embarrassment and mental stress. The ECOA has both private remedies that consumers can pursue as well as public enforcement by such agencies as the Federal Trade Commission the Department of Justice, the Department of Housing and Urban Development, and the Consumer Financial Protection Bureau. B. The Fair Credit Reporting Act Emphasize: That every year in the United States many times as many credit reports are issued as there are people in the country. That the act covers agencies preparing reports concerning consumers seeking credit, as well as persons in relation obtaining jobs, shelter, or insurance. Consumer Rights under FCRA Emphasize: Why, on any report covered by the act, consumers have the right to be told the name of the agency making the report, to require the agency to reveal the information given in the report, and to correct the information or at least give consumers‘ version of the facts in dispute. That this law does have one important limitation. It provides that a report containing information solely as to transactions or experiences between the consumer and the person making the report is not a ―consumer report‖ covered by the act. Sidebar 18.4—―Who Regulates FinTech?‖ Investigative Consumer Reports Emphasize: That an investigative consumer report concerns not only credit but a consumer‘s character, general reputation, and mode of living obtained by personal interviews. That no one may obtain such a report unless at least three days‘ advance notice is given the consumer that such a report will be sought. 1-307
Observing Reasonable Procedures Emphasize: That credit reporting agencies are liable for failing to follow reasonable procedures in preparing credit reports. The act is enforced by the FTC and by private remedies. FCRA Penalties and Remedies Discuss: How The Federal Trade Commission can enforce the FCRA. In addition, anyone who violates the provisions of the act is civilly liable to an injured consumer. Cases where the consumer may recover actual damages, attorney‘s fees, and in some instances punitive damages. Case 18.3—―Safeco Insurance Company v. Burr, 551 U.S. 47 (2007).‖ Fair and Accurate Credit Transactions Act Amendments Emphasize: The FCRA was amended in 2003 by the Fair and Accurate Credit Transactions Act (FACT). That the FACT Act provides for the right to dispute information on credit reports with the information furnisher and permits consumers to place fraud alerts on the report to notify creditors of identity theft. In addition, the FACT Act allows consumer to obtain a free credit report from national consumer reporting agencies (Experian, Trans Union, and Equifax) each year. C. The Truth-in-Lending Act Emphasize: That the act authorizes the Federal Reserve Board to adopt regulations to ensure a full disclosure of credit terms that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit. That rulemaking authority has now been assumed by the Consumer Financial Protection Bureau. The FTC enforces these regulations. Truth-in-Lending Coverage Discuss: 1-308
That the act covers all transactions in which a business extends credit to a natural person and a credit charge may be imposed on a loan obtained primarily for personal, family, household, or agricultural purposes. It covers loans secured by real estate, such as mortgages, as well as secured and unsecured loans when a borrower repays in four installments or more. That there are both civil and criminal penalties for violating truth in lending, including mortgage rescission in certain instances.
Finance Charge and Annual Percentage Rate Explain: That the Truth-in-Lending philosophy of full disclosure is accomplished through two concepts, namely, the finance charge and the annual percentage rate (APR). That the finance charge is the sum of all charges payable directly or indirectly by the debtor or someone else to the creditor as a condition of the extension of credit. Financing Statement Explain: The finance charge and annual percentage rate are made known to borrowers by use of a financing statement. This statement must be given to the borrower before credit is extended and must contain, the following information: any default or delinquency charges that may result from a late payment, description of any property used as security, the total amount to be financed, including a separation of the original debt from finance charges. Penalties and Remedies under Truth-in-Lending Emphasize: Ways in which the civil liability provisions make creditors liable to debtors for actual damages and an amount equal to twice the finance charge, within a statutorily defined range. That the Truth-in-Lending Act gives debtors the right to rescind or cancel certain transactions for a period of three business days from the date of the transactions or from the date they are given the notice of their right to rescind, whichever is later. Sidebar 18.4—―Truth-in-Landing and the Subprime Mortgage Mess‖ Truth-in-Lending Trends
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Explain: How in 1980, Congress passed the Truth-in-Lending Simplification Act. Two changes from the original act stand out. The two changes from the original act that stand out. First, the law eliminates statutory penalties based on purely technical violations of the act. Second, the Simplification Act requires the government to issue model disclosure forms. Studies conducted by the FTC show that many of those involved in credit extension, such as home builders and realtors, fail to make required Truth-in-Lending disclosures in their advertising. V. Debt Collection and Consumer Protection Emphasize: In a consumer-credit-oriented economy, the collection of bad debts is very important. That annually creditors turn over bills totaling many billions of dollars for collection. A. The Fair Debt Collection Practices Act Emphasize: Due to complaints that some debt-collection agencies used techniques of harassment, deception, and personal abuse to collect debts, Congress in 1978 passed the Fair Debt Collection Practices Act (FDCPA). That the act applies the primary business of collecting consumer debts. Included is debt collection by the Internal Revenue Service and by attorneys. Creditor collection efforts are exempt from the act. Table 18.4—―FDCPA‘s Regulation on Collection Methods of Collection Agencies‖ FDCPA Remedies and Enforcement Discuss: If the consumer debtor desires to stop the debt collector from repeatedly contacting him or her about payment, the debtor need only notify the collector in writing of this wish. Violations of the FDCPA entitle the debtor to sue the debt collector for actual damages, including damages for invasion of privacy and infliction of mental distress, plus court costs and attorney‘s fees. State Laws Regulating Debt Collection Explain: 1-310
Congress specified that the FDCPA does not preempt state laws regulating debt collections so long as they are stricter than FDCPA standards.
B. Consumer Financial Protection Act Explain: How, at the height of the recession in 2010, Congress passed the Consumer Financial Protection Act. Why, its authority overlaps that of the Federal Trade Commission (FTC) in administering consumer laws such as the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth-in-Lending Act, and the Fair Debt Collection Practices Act, along with several others. C. Bankruptcy Emphasize: That Congress is authorized to establish bankruptcy laws by the Constitution and that these laws are not administered by the Federal Trade Commission. These laws establish a procedure by which the ―honest debtor‖ can get rid of debts by having them ―discharged.‖ Bankruptcy Proceedings Establish: That bankruptcy may be initiated by the debtor filing a voluntary petition or by one or more creditors filing and involuntary petition. The creditors who sign an involuntary petition must be owed at least $16,750. That two alternatives are possible in a bankruptcy proceeding against an individual: Chapter 7 liquidation and Chapter 13 adjustment. How Congress amended the bankruptcy law in 2005 to force above median income earners to adjust their debts rather than have them liquidated. Trustee in Bankruptcy Explain: The trustee in bankruptcy and the powers of the trustee. The trustee is someone elected by the creditors to represent the debtor‘s estate in taking possession of and liquidating (selling off) the debtor‘s property. Creditor Priority 1-311
Discuss: That under bankruptcy laws, certain creditors receive priority over others in the distribution of a debtor‘s assets. Table 18-5—―Priority of Bankruptcy Creditors‖ The amounts owing to each creditor class must be satisfied fully before the next lower class of priority can receive anything. Discharge Explain: The significance of bankruptcy discharge and the debts that cannot be discharged. Also explain the circumstances under which a debtor will be denied discharge. D. Additional Consumer Protection Explain: Fair Credit Billing Act—administered by the Federal Trade Commission, this act limits liability on lost, stolen, or misused credit cards to $50. Establishes rules for resolving billing disputes with the credit card issuer. Electronic Fund Transfer Act —administered by the Consumer Financial Protection Bureau this act limits liability on lost, stolen, or misused automatic teller and check cards (debit cards) to $50 if reported within two business days of consumers‘ learning of a misuse. After two business days, consumers responsibility is up to $500, except that after 60 days without reporting, responsibility becomes unlimited. Consumer Product Safety Act—administered by the Consumer Product Safety Commission. The act requires the commission to protect consumers against ―unreasonable risk‖ of harm and applies to thousands of consumer products. Magnuson-Moss Warranty Act—administered by the Federal Trade Commission. Applies to all product warranties on consumer products costing more than $15. Federal Food, Drug and Cosmetic Act—administered by the Food and Drug Administration, this act and the rules established under it by the FDA establish that prescription drugs must be proven effective and safe by extensive testing before they can be sold. Additional Matter for Discussion: Mention the change that began in 2008 with consumer credit spending and debt. Instructors need to enter into a discussion about the consumer savings rate. People will spend. According to the New York Times (11/12/08), ―For decades—from the 1950s through the 1980s—Americans spent about 91 percent of their income, on average, and 1-312
put away the rest. In the last few years, they have spent close to 99 percent and saved only about 1 percent.‖ Observe that a major cause of the 2008 recession was a tremendous rise in consumer debt, and that when consumers finally stopped spending the economy went into recession. As production consequently declined, joblessness rose, and consumer spending declined even more. However, even in this downward spiral, which Washington tried to bring under control with stimulus packages, debt collection remained an issue. In 2005, personal bankruptcies soared to 2 million. However, in the year Congress amended the bankruptcy law to make it much more difficult to get Chapter 7 liquidation as opposed to Chapter 13 adjustment of debts. In 2006, bankruptcies declined to 573,000. Since then, however, even under the more stringent requirements, bankruptcies have been rising again, to over 800,000 in 2007 and over a million in 2008 according to the American Bankruptcy Institute. In the early years of the new millennium, rising home prices staved off personal bankruptcies in many parts of the country because people could borrow against their home equity to repay mounting debts. However, when home prices started declining, personal bankruptcies shot up. As students may be particularly interested in the fair credit billing act, you may choose to include the following statement provided in a guide from the Federal Trade Commission: ―You may withhold payment on the disputed amount (and related charges), during the investigation. You must pay any part of the bill not in question, including finance charges on the undisputed amount. The creditor may not take any legal or other action to collect the disputed amount and related charges (including finance charges) during the investigation. While your account cannot be closed or restricted, the disputed amount may be applied against your credit limit. The creditor may not threaten your credit rating or report you as delinquent while your bill is in dispute. However, the creditor may report that you are challenging your bill. In addition, the Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants who exercise their rights, in good faith, under the FCBA. Simply put, you cannot be denied credit simply because you‘ve disputed a bill.‖ Discuss the federal law called the Buckley Amendment, which requires that educational institutions protect student privacy regarding grades and other information. Explain that the law is relatively toothless in that the only enforcement of it is through the withdrawal of federal funds from an institution, which has never been done because of merely accidental disclosure violating student privacy. Explain that the legal concept of privacy is only about a hundred years old, but that the concept of the legal fence protecting some object is very old. Once one‘s ―solitude‖ is recognized as an object protected by the legal fence under specific circumstances, one 1-313
can look to the state for enforcement. Although we may call this protection ―privacy,‖ it is merely the extension of the legal fence of property to a new object.
Answers to Review Questions and Problems The Federal Trade Commission 1.
The FTC and Trade Practice Regulation a.
b.
2.
A cease and desist order comes from an administrative law judge and is mandatory. A consent order is legally binding but is agreed to between the FTC and a respondent. The consent order is used most frequently at the FTC because it is too inefficient and time-consuming to take every case before an administrative law judge. A trade regulation rule is an official interpretation of the FTC Act by the Commission. It has the force of law.
FTC Penalties and Remedies It could face civil fines of up to $42,530 (per the 2019 adjustments) for each violation, as well as corrective advertising, rescission of contacts, refund of money, payment of damages to consumers, and public notification of trade practice violations.
3.
Politics, Economics and the Law Student answers will vary on this question.
Privacy 4.
Limitations on Government Intrusion Although the government does provide protection against searches, it is to a limited extent. An example of governmental protection against invasion of privacy is the Fourth Amendment right against ―unreasonable searches and seizures‖ that prevents the government from collecting much private information without a search warrant. Another example of just such an act is The Privacy Act of 1974. This regulates ways in which information can be collected.
5.
Traditional Business Privacy That is highly unlikely. This is because the shop is only trying to protect its business against 1-314
theft and shoplifting. Therefore, in a public setting, the shop may not be held liable for recording shoppers. 6.
Electronic and Online Privacy (a) BigCo may be held responsible for monitoring calls on the office landline phones. This is because the Electronic Communications Privacy Act clearly states that it is illegal to record either electronic or wired communications without authorization. Therefore, under this statute, even though the landline is office property, it may still be in violation of the ECPA to monitor calls. (b) COPPA applies to any company that knowingly collects information from children under the age of 13, even if that is not the primary purpose of the Internet site. Therefore, yes, the company is subject to the Children‘s Online Privacy Protection Act. (c) This is a subjective question and opinions will vary. There needs to be a certain degree of protection for online activities. However, it may be impractical to offer a legal fence to monitor and protect all online activity. Businesses can use online materials for marketing purposes. However, in addition to legal fences, they also need to have their own protection systems in place.
7.
International Privacy Protection The General Data Protection Regulation (GDPR). Among the regulation‘s provisions are requirements that firms notify customers of data breaches within three days and provide individuals ―the right to be forgotten‖ by facilitating erasure of outdated or irrelevant information. As a ―regulation,‖ the GDPR is binding on EU members as written without the possibility for country-to-country interpretation. The GDPR impacts U.S. companies that do business in Europe. The regulation specifically covers the collection and processing of data from individuals in the EU, even if a firm is located outside of the Union.
False Advertising 8.
The FTC will evaluate this advertising and likely determine it deceptive for failing to disclose that the claim only applies to areas where there is no standing water.
9.
Because Pom Wonderful has a commercial interest to sue, it would likely have standing against Coca-Cola in a Lanham Act claim for unfair advertising.
Federal Credit Regulations 1-315
10. The Equal Credit Opportunity Act Jane will most likely win under the ECOA. This is because the manager informed her that she would have to get her husband to cosign. The proper thing for the manager to have done would have been to tell her that she would have to get ―someone else‖ to cosign with her. 11. The Fair Credit Reporting Act (a) Mary Jane should check her credit rating and should determine whether the department store refused her credit on the basis of a credit report. The store may be liable if it failed to identify that it had refused her credit on the basis of an adverse credit report. (b) A freeze restricts lender access to a consumer credit report unless the consumer lifts the restriction. 12. The Truth-in-Lending Act The finance charge includes all charges payable directly or indirectly by the debtor to the creditor as a condition of the extension of credit. Charges such as interest, service charges, loan fees, points, finders fees, fees for appraisals, credit reports, and life or health insurance required as a condition of the loan are included as part of finance charges. Recording fees, taxes, title insurance, notary fees, and attorney‘s fees for preparing deeds are not part of the finance charges. Debt Collection and Consumer Protection 13. The Fair Debt Collection Practices Act Yes, Dan should write a registered letter to the credit bureau refusing to pay the debt and instructing the bureau not to contact him or his family again. If his credit bureau is contacting the family and telling them to pay the debt or admonishing them to have Dan pay the debt, the credit bureau will be liable to be sued by Dan in a court of law. 14. Consumer Financial Protection Act The FCPA was passed to provide additional oversight regarding consumer protection. The creation of the CFPB adds an additional layer of enforcement and supervision in an area of law greatly affecting individuals and the nation. 15. Bankruptcy 1-316
If discharge is given, it means that the debtor is no longer legally required to pay the debts (since the debt has been discharged). Nondischargeable debts under bankruptcy include those arising from taxes, alimony and child support, intentional torts, breach of fiduciary duty, liabilities arising from drunken driving, government fines, debts not submitted because the creditor lacked knowledge of the proceedings, and educational loans that have become due within five years of the filing of the bankruptcy petition. 16. Additional Consumer Protection Assuming that the spa is in her home state or within a 100 mile radius of her home and that the contract involves over $50, Janet should write a letter to the last known address of the spa demanding that the owner make good on the contract and then instruct the credit card issuer to recredit her account.
Business Discussion Student answers will vary. However, deceptive trade practices look at the point of view of a reasonable consumer, so negligence could occur. Also, if done with intent, fraud can occur, which also may lead to punitive damages.
Chapter 19 Environmental Regulation and Resource Sustainability Learning Objectives The purpose of this chapter is to introduce the student to basic environmental regulation, especially at the national level. Students should finish the chapter with a deeper appreciation of the complex political and scientific problems associated with environmental regulation. They should also understand that environmental regulation of private enterprise is basically a joint federal-state effort.
References 1-317
Aldrich, James R., Pollution Prevention Economics: Financial Impacts on Business and Industry. New York: McGraw-Hill (1996). Baumol, William J., The Theory of Environmental Policy, 2d ed. New York: Cambridge U. Press (1988). Ewing et al., Environmental Law Handbook, 24th ed., Berman Press, (2019). Ferrey, Steven, Environmental Law: Examples and Explanations, 8th ed. Wolters Kluwer (2018). Daniel A. Farber, Environmental Law in a Nutshell, 10th ed., (2019) Kubasek, Nancy K. and Gary S. Silverman, Environmental Law, 8th ed. Prentice Hall (2014). Mandelker, D.R., NEPA Law and Litigation. Callaghan (1984). Miller, Jeffrey G., Citizen Suits: Private Enforcement of Federal Pollution Control Laws. New York: Wiley Law Pub. (1987). Sands, Philippe et al., Principles of International Environmental Law, 4th ed., Cambridge U. Pr. (2018).
Teaching Outline I. Introduction Emphasize: That environmental and pollution control laws set regulation on three levels: government‘s regulation of itself; government‘s regulation of business; and suits by private individuals. Sidebar 19.1—―Categories of Environmental and Pollution-Control Laws‖ Additional Matters for Discussion: More companies are grappling with environmental issues. According to Steve Liesman, ―Texaco Appears to Moderate Stance on Global Warming,‖ WSJ, 5/15/00: ―Big energy companies, auto makers and utilities are increasingly wrestling with global-warming issues as they strive to respond to growing public concern and react to changing environmental regulations.‖ According to an international Gallop poll of over 22,000 people in 22 countries, the majority of citizens in 16 of the 22 countries expressed a willingness to pay higher products prices in exchange for increased environmental protection. At the 1990 annual meeting of the World Economic Forum, 650 international industry and government leaders ranked the environment as the number one challenge facing business. On the complicated nature of the relationships between the environment, jobs, and regulation, see ―Tree-Huggers vs. Jobs: It‘s Not That Simple,‖ Business Week, 10/19/92, p. 108. 1-318
II. Government’s Regulation of Itself A. The National Environmental Policy Act (LO 19-1) Emphasize: The way in which the government regulates the environmental impact of its decisionmaking is a great concern to the business community. That the National Environmental Policy Act (NEPA) is any congressional legislation that influences the decision making concerning federal funding or license granting also affects business. NEPA Basics Emphasize: That NEPA establishes a ―national policy [to] encourage productive and enjoyable harmony‖ with nature and promotes ―the understanding of the ecological systems and natural resources‖ important to the United States. That it requires that an environmental impact statement (EIS) be included ―in every recommendation or report on proposals for legislation and other major Federal actions significantly affecting the quality of human environment.‖ B. Evaluation of Environmental Impact Statements Emphasize: The criticisms of the EIS process. Mainly the economic injury caused by abandoning or delaying projects, as well as the lack of consideration of economic reasonableness. That environmental factors are often so complex that the EIS process may amount to little more than guesswork. Figure 19.1—―Components of the environmental impact statement‖ Case 19.1—―Sierra Forest Legacy v. Sherman‖ 646 F.3d 1161 (9th Cir. 2011). NEPA Trends Discuss: How currently, NEPA is being applied to some of the most significant issues of the day. The application of NEPA to greenhouse gases‘ emissions. Will NEPA remain a potentially powerful tool for administrative agency action concerning environmental concerns after being scaled back in 2020? 1-319
Cases for Discussion 1.
Petitioners brought this action against the Federal Energy Regulatory Commission contending that the Commission violated NEPA by failing to prepare an EIS before it issued a preliminary permit for the Clavey-Wards Ferry hydroelectric project. Held: No EIS was required. The preliminary permit did not authorize groundbreaking or other activities that might significantly affect the environment. Sierra Club v. FERC, 22 ERC 2024 (1985).
2.
The Sierra Club sued to enjoin the Department of Interior from issuing mining leases on federal lands in the ―Northern Great Plains‖ region until the department had prepared an EIS on the entire region. Held: NEPA requires an EIS only when a recommendation or report on a proposal for major federal action has been prepared. In this instance, there was no recommendation or report on a proposal for major federal action in the region. Several preliminary studies of individual states in the region did not constitute a ―plan‖ that would require the preparation of an EIS. Kleppe v. Sierra Club, 427 U.S. 390 (1976).
3.
According to the Ninth Circuit, the U.S. Forest Service decision not to prepare an EIS prior to granting a special use permit for the construction of a road through the Angeles National Forest violates NEPA. The road passes directly through an area occupied by a herd of desert bighorn sheep protected under state and federal law. Applying a reasonableness test, the court ruled that the environmental assessment failed to consider adequately the impact upon the sheep of the proposed action. The assessment contained no estimate of the volume of traffic likely to pass along the road and ignored other factors essential to an informed decision on whether the project might have significant environmental impacts and thus require an EIS. Foundation for North American Wild Sheep v. Dept. of Agriculture, 12 ELR 20968 (1982).
III. Government’s Regulation of Business (LO 19-2) Explain: That more and more companies are hiring environmental managers to deal with environmental compliance issues.
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A. The Environmental Protection Agency Emphasize: That the formation of the EPA in 1970 centralized the federal government‘s environmental regulation of private business. Sidebar 19.2—―Responsibilities of the EPA‖ Additional Matters for Discussion: According to the EPA, for more than forty-five years the Clean Air Act has cut pollution as the U.S. economy has grown. B. Air Pollution Discuss: The role played by clean air in medieval times in relation to modern times. The in the United States the key federal legislation for controlling air pollution is the Clean Air Act. Clean Air Act and Amendments Explain: That the Clean Air Act directs the EPA administrator to establish air quality standards and to see that these standards are achieved according to a timetable. The primary and secondary air quality standards. That government regulation under the Clean Air Act is a joint federal and state effort. The responsibilities of both the federal government and the states. Stationary and mobile sources of pollution. Additional Matters for Discussion: Expressing concern about airborne toxic chemicals, the 1990 amendment to the Clean Air Act requires industry to use the ―best available technology‖ on plants to reduce emissions of 189 toxics by 90 percent. Significantly, the plants covered include bakeries and dry cleaning businesses as well as chemical companies. Clean Air Act Enforcement Explain: That criminal sanctions include fines of individuals up to $250,000 and up to 15 years‘ imprisonment. Corporations can be fined up to $1 million for knowingly endangering people with 1-321
emissions and up to $500,000 per incident of negligent emissions. Air Pollution Sources Discuss: The types of air pollution as described by the Clean Air Act amendment. Measures undertaken to limit release industrial air pollutants. The technology-forcing aspect of the act. C. Clean Air Act Today Emphasize: On examples where the Clean Air Act did not try to promote efficient pollution. The concept of point source within an industrial area or complex. The importance of the bubble concept. Note that it is an attempt to make environmental regulation more economically efficient. Emissions Reduction Banking Explain: That a number of states have developed EPA-approved plans for emissions reduction banking. Emissions reduction banking as a step toward a property approach to pollution control. Prevention of Significant Deterioration Discuss: That another important policy of the Clean Air Act is the prevention of significant deterioration. The Permitting Process Explain: The complexities of obtaining permits under the Clean Air Act. The various factors that contribute to inordinate delays in obtaining permits. The concept of smart permits. Indoor Pollution
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Explain: The problem of indoor air pollution. Factors contributing to indoor pollution. Table 19.1—― Examples of World Air Pollution Concerns‖ Additional Matters for Discussion: Compared to 1970 vehicle models, new cars, SUVs and pickup trucks are roughly 99 percent cleaner for common pollutants (hydrocarbons, carbon monoxide, nitrogen oxides and particle emissions). New heavy-duty trucks and buses are roughly 99 percent cleaner than 1970 models Research by Donald H. Stedman, a University of Denver chemist, suggests that only a small fraction of automobiles, as low as 8 percent, account for over half of all automobile pollution. Conclusion Discuss: Evidence that indicates that the overall air quality in the United States is steadily improving. The leadership role of the United States in regulating global pollution control measures. Case 19.2—―Environmental Protection Agency v. EME Homer City Generation L.P.‖ 134 S.Ct. 1584 (2014). Cases for Discussion: 1.
The EPA lacks the power to condition approval of a state implementation plan on California adopting a vehicle emission control program. Virginia v. EPA, 65 LW 2609 (CA DC 1997).
2.
The Fifth Circuit held that the language of Section 307(f) of the Clean Air Act and its legislative history support the award of attorney‘s fees to a prevailing corporate litigant. Moreover, the court found no indication in the statute or its legislative history that Congress intended to limit attorneys‘ fees to public interest groups or to deny them to solvent organizations that have an economic interest in the outcome of the litigation. Florida Power and Light Co. v. Costle, 12 ELR 21071 (1982).
D. Water Pollution Explain: 1-323
That almost one-half of all water used in this country is for cooling and condensing purposes in connection with industrial activities. The resulting discharge into our rivers and lakes sometimes takes the form of heated water, called thermal effluents. That the Clean Water Act applies only to the pollution of ―navigable‖ waterways, intrastate as well as interstate. Sidebar 19.3—―The Dakota Access Pipeline Controversy‖
Goals and Enforcement Explain: That the Clean Water Act is also administered by the states in accordance with EPA standards. What constitutes a point source? The two-step sequence for cleanup of industrial waste discharged into rivers and streams. Cases for Discussion: 1.
The Supreme Court has ruled that the EPA‘s interpretation of the Clean Water Act must be given deference. The Court held that neither statutory language nor legislative history of the act precluded EPA interpretation of the statute, which prohibits modification of toxic pollutant effluent limitations, as permitting the grant of different variances for certain covered pollutions. Chemical Manufacturers Association v. Natural Resources Defense Council, Inc., 105 S.Ct. 1102 (1985).
2.
Riverside Bayview Homes, Inc. began placing fill materials on its property near the shores of Lake St. Clair, Michigan. The Army Corps of Engineers filed suit to enjoin this placement without a permit. Held: The Corps properly interpreted ―navigable waters‖ to include all freshwater wetlands adjacent to other covered waters. U.S. v. Riverside Bayview Homes, 54 LW 4027 (1985).
Additional Matters for Discussion: In May, 2003, the EPA‘s inspector general released a report asserting that the EPA‘s computer system that tracks permits for pollution effluents from more than 64,000 facilities is obsolete and full of faulty data. The report claims that the system software, which is supposed to check a facility‘s monthly effluent discharges against 1-324
its allowable amounts, needs drastic revision. In 2001, Koch Industries was fined $20 million after pleading guilty to releasing 91 metric tons of toxic bezene into waste streams. In 2002, Georgia Pacific agreed to pay some $10.1 million to clean up the Fox River in Wisconsin following illegal discharge of toxic PCBs. According to a report released by the National Academy of Sciences in 2002, about 85 percent of the 29 million gallons of oil pollution in North American coastal pollution comes from run off—mostly street run off—rather than from marine oil spills.
E. Endangered Species Act Emphasize: That every entire day species of animals and plants die off. That the ESA is, perhaps, the nation‘s most controversial environmental standard. The meaning of ―endangered.‖ Application of the ESA Describe: The definition of ―taking.‖ The definition of ―harm.‖ The recovery plans of the ESA to protect species it protects. Additional Matter for Discussion: In 1998 a 20-year research effort concluded that over one-tenth of the planet‘s plant species were threatened with extinction. In the United States some 29 percent of plants (16,000 species) were threatened. The study maintained that loss of habitat and competition from human introduction of non-native species were the two main reasons for the threats. F. Pesticide Control (19-3) Emphasize: Pests, especially insects and mice, destroy over 10 percent of all crops grown in the United States, causing several billion dollars of damage annually. The widespread, continual application of pesticides creates environmental problems. The Federal Pesticide Acts
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Emphasize: The Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended, and the Federal Environmental Pesticide Control Act of 1972 (FEPCA). The EPA requires that employers train agricultural workers in pesticide safety, post safety information, and place warning signs to keep workers out of freshly sprayed fields. Enforcement Emphasize: That the regulation of pesticides takes place at the federal level. Regulation consists of a regulation process backed up by the power to ban and limit the use of pesticides. That pesticide control has been attacked by both affected businesses and the environmental movement itself. Additional Matters for Discussion: According to the Food and Agricultural Organization, a UN agency, over 550,000 tons of obsolete and unused pesticides threaten people and the environment. In 1997 Congress passed the Food Quality Protection Act that the EPA must set standards for all health risks from pesticide residues in both raw and processed foods. Polls show that farmers have an increasing awareness of the toxic effects of pesticides and fertilizers and are using less of them. A primary problem of pesticide regulation is that it is accomplished in important measure by the states, and the states have turned regulation over to their departments of agriculture, which exist to aid farmers. The EPA has issued rules requiring employers to train agricultural workers in pesticide safety and place warning signs on freshly sprayed fields. As many as 1,000 agricultural workers die annually from pesticide poisoning. G. Solid Waste Emphasize The problems associated with solid waste disposal. Federal environmental regulation comes into play for most types of solid waste when they are burned into the air or dumped into the water. How solid waste pollution problems during the last 25 years have grown as pollution has risen and the country has become more affluent and productive. How landfills assist in solid waste management. The Solid Waste Disposal Act 1-326
Explain: That the Solid Waste Disposal Act was passed in 1965. That the control of solid wastes per se is mostly a state and local problem. The various approaches undertaken by local and state government bodies. How tax breaks can encourage recycling of solid wastes. Figure 19.2—―Composition of a typical landfill by volume‖ Additional Matters for Discussion: Many companies are becoming ―green conscious.‖ For instance, Coke and Pepsi have introduced bottles made with recycled plastic and Sears has reduced the quantity of its packing materials by 25 percent. An older but excellent short article is Levin, ―The Trash Mess Won‘t Be Easily Disposed Of,‖ Wall Street Journal, December 15, 1988. H. Toxic and Hazardous Substances Emphasize: That the control of toxic substances ranks first on the public‘s list on where the government‘s regulation of industry is needed. That the control of toxic chemicals may be divided into regulation of their use, regulation of their disposal, and regulation of their cleanup. The Problem Discuss: The most dangerous threat to human welfare: toxic substances. That there are more than 70,000 industrial agricultural chemical compounds are in commercial use already, and new chemicals, a significant percentage of which are toxic, are being introduced in the marketplace at the rate of over 1,000 substances annually. Explain that the great majority of these chemicals have never been tested for their effect on humans or the environment. Toxic Substances Control Act Emphasize: That the purpose of the Toxic Substances Control Act is to force an early evaluation of potentially toxic chemicals before they become economically important. That manufacturers must report to the EPA any information they possess indicating 1-327
that a chemical substance presents a ―substantial risk‖ of injury to health or the environment. The EPA must also be given advance notice before the manufacture of new chemical substances. The difficulty of evaluating chemical substances in commerce. Explain that the EPA has developed a priority scheme for testing.
Resource Conservation and Recovery Act Explain: That more than a ton of hazardous waste per citizen is dumped annually into the nation‘s environment. That the Resource Conservation and Recovery Act attempts to regulate the disposal of toxic wastes through the manifest system. The Superfund Discuss: In 1980, Congress created the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The significance of the Superfund law. That the act requires anyone who releases unauthorized amounts of hazardous substances into the environment to notify the government. Refusal to obey can lead to a suit for reimbursement for any cleanup monies spent from the Superfund plus punitive damages of up to triple the cleanup costs. Liability under Superfund Explain: That the Superfund imposes strict liability on those responsible for unauthorized discharges of hazardous wastes. The term ―responsible parties‖ and who is included in its ambit. That Liability includes the costs of remediation, which are basically the costs of restoring land to its previous condition. Case 19.3—―Burlington Northern and Santa Fe Railway Co. v. United States‖ Reforms to Superfund Discuss: The three possible reforms to the superfund laws. And take note that both the Clean Air Act and the Clean Water Act also contain 1-328
provisions related to government suits to recover costs for the cleanup of toxic chemicals. Radiation Discuss: The potential hazards of radiation pollution. That the EPA, however, does have general authority to conduct testing and provide technical assistance in the area of radiation pollution control. Additional Matters for Discussion: In 1996 Congress enacted the Asset Conservation Lender Liability and Deposit Insurance Protection Act. The law defines activities that lenders can take without risking liability under CERCLA. In 2018 EPA actions at a net total of 32 additional sites controlled potential or actual human exposure risk, bringing the cumulative total at the end of FY 2018 to 1,507 sites. A number of states have passed environmental cleanup laws, including New York, California, Ohio, New Jersey, Illinois, Wisconsin, and Arkansas. These laws supplement federal law and are implicitly forcing property buyers to factor potential cleanup costs into their purchase prices. A 1992 Rand Institute for Civil Justice study of Superfund insurance-related payouts showed that 79 percent of the spending of 4 insurance companies went to paying legal bills, 9 percent went to internal administrative costs, and only 12 percent went to covering policyholders‘ environmental cleanup liabilities. See Moses, ―Insurance Payouts Over Superfund Flow to Lawyers,‖ Wall Street Journal, 4/24/92, p. B1. The number of Superfund cleanups completed in fiscal years 2001 and 2002 fell 41 percent compared with the annual average from the previous eight years. It has continued to fall since then. Cases for Discussion: 1.
Alcan Aluminum Ltd. was one of twenty alleged polluters of a certain site. Only Alcan refused to settle with the government. Under joint and several liability the government ordered Alcan to pay the remaining $474,000 of the $1.3 million it would take to clean up the site. Alcan went to court. Held: It was held by CA3 that the district judge erred in requiring Alcan to pay the remaining balance of the clean-up costs without determining whether it was responsible for such a large portion of the damages. U.S. v. Alcan, 91-5481 (CA3). 1-329
2.
Upon finding that a 16-acre site in Norwood, Massachusetts owned by Paul and John Reardon was polluted with polychlorinated biphenyls, the EPA filed a lien on the Reardons‘ property with the appropriate registry of deeds. Lien filing is permitted under CERCLA. The Reardons went to court. Held: It was held by CA1 that the lien filing provision of the act violates the Fifth Amendment‘s due process clause because it fails to provide for a reasonable hearing on the lien filing. Reardon v. United States, 90-1390 (CA 1).
3.
In 1992 CA2 decided that municipalities that contributed to toxic dumpsites could be assessed cleanup costs under the Superfund. The EPA has estimated that municipalities are potentially liable in at least 25 percent of its 1,200 priority cleanup sites.
4.
The owners of Vineland Chemical Co. improperly disposed of water containing arsenic. Held: It was held by D. N.J. that the owners must pay penalties of $1,223,000 and face liability for clean up that could approach $66 million. United States v. Vineland Chemical Co. (4/30/90).
5.
Steel manufacturers producing ammonia and other hazardous wastes injected it into deep wells from 2,500 to over 4,000 feet into the ground. The manufacturers argued that the injections were ―discharges‖ handled under the Clean Water Act‘s state pollution permitting rather than ―disposals‖ regulated under RERA. Held: It was held by CA7 that the injections are disposals regulatable under RCRA. Their connections with navigable waterways, which is required by the Clean Water Act, are too tenuous. Inland Steel Co. v. EPA, 58 LW 2699 (1990).
6.
The chemical supplier of a wood processing plant helped build part of the plant and furnished the plant with a toxic chemical used in wood processing. When the EPA forced the plant owner to clean up its plant site under Superfund, the owner sued the chemical supplier for contribution. Held: It was held by the Seventh Circuit Superfund imposes clean-up liability on any party who was ―owner‖ or ―operator‖ of a site at the time hazardous wastes were deposited. Looking at the law of independent contractors and joint venturers, the court concluded that the chemical supplier was neither an owner nor an operator. Edward Hines Lumber Co. v. Vulcan Materials Co., 861 F.2d 155 (1988). In U.S. v. 1-330
Fleet Factors Corp. (12/22/88) the Eleventh Circuit ruled that a lender who had a security interest in a fabric printing firm was not an owner or operator even though customers of the firm made payments directly to the lender. U.S. v. Aceto Agriculture Chemicals Corp. ruled that pesticide manufacturers that hired a pesticide formulation facility to process their pesticides were liable for clean up costs because they ―arranged for‖ and ―contributed to‖ handling and disposal of hazardous wastes. (CA8, 4/25/89). IV. Suits by Private Individuals Discuss: The two principal areas for the private control of private actions. A. Citizen Enforcement Emphasize: Than in many instances, private citizens can sue polluters directly to force them to cease violating the law. On the citizen enforcement provisions of the environmental law. Additional Matter for Discussion: An older but interesting short handout on citizen enforcement is ―Group‘s Influence on U.S. Environmental Laws Earns It a Reputation as a Shadow EPA,‖ Wall Street Journal, Jan. 13, 1986, p. 50. Cases for Discussion: 1.
The plaintiff Friends of the Earth sued defendant incinerator company for allegedly discharging illegal mercury discharge into the North Tyger River. Held: It was held by the Supreme Court that Friends of the Earth is an appropriate plaintiff with standing to sue because it alleged that its members suffered ―injury in fact‖ by being denied the recreational and aesthetic values of the river. Friends of the Earth v. Laidlow Environmental Services, 528 U.S. 167 (2000).
2.
A manufacturer delayed construction of a waste water treatment facility. It was sued by a Nader student group. Held: It was held by D.N.J. that manufacturer must pay a $1.68 million fine. Student Public Interest Research Group of New Jersey Inc. v. Hercules Inc., 19 Environment 1-331
Rptr. 2687 (4/6/89). In 1990 the Sierra Club Legal Defense Fund settled with Unocol Corp. for $5.5 million over alleged pollution of San Francisco Bay. 3.
In Gwaltney v. Chesapeake Bay Foundation, Inc. the U.S. Supreme Court ruled that the citizen enforcement provision of the Clean Water Act conferred no jurisdiction over ―wholly past violations,‖ but did convey jurisdiction based on good faith allegations of ―continuous‖ or ―intermittent‖ violations. 108 S.Ct. 376 (1987). The significance of this case is that it may reduce (or eliminate) the possibility of a citizen suit arising from a one-time, past violation of the act. Already Gwaltney has inspired new litigation interpreting that case. See, e.g, Public Interest Research Group v. Carter-Wallace, Inc., 56 LW 2621 (1988).
B. Tort Theories Emphasize: The various common law tort theories and how they apply to environmental harms. How traditional deterrence of tort law contributes to private control of private action. Nuisance Emphasize: The two types of nuisances. The distinction between a private and a public nuisance. Other Tort Doctrines Describe: The doctrine of trespass. How negligence doctrine is sometimes used by private plaintiffs in environmental pollution cases. Why some courts recognize the applicability in pollution cases of strict liability tort doctrine. Additional Matters for Discussion: Large private tort suits over alleged pollution-related harms can take a long time to litigate and cause much community ill-will. See Harlan, ―Hundreds of Businesses Wait and Run Up Bills as Tort Case Drags On,‖ Wall Street Journal, 2/6/92, p. A1. A good handout article is Barrett, ―Courts Lend Sympathetic Ear to Claims for Compensation Based on Cancer Fear,‖ Wall Street Journal, Dec. 14, 1988, p. B1. But by 1993 see Felsenthal, ―Risk-of-Illness Cases Are Getting Unsympathetic Ear from 1-332
Courts,‖ Wall Street Journal, July 7, 1993, p. B8. Cases for Discussion: 1.
T & E Industries sued Safety Light Corp., a successor corporation to United States Radium Corporation for damages arising from contamination of its property by radium. Held: It was held by the New Jersey Supreme Court that Safety Light Corp. can be held strictly liable for ―abnormally dangerous activities.‖ T & E Industries, Inc. v. Safety Light Corp., 59 LW 2609 (1991).
2.
Plaintiffs sued a lead company to recover for damage to their agricultural property from accumulations of lead particulates and sulfur oxide deposits. The circuit court rendered judgment for the lead company, and the land owners appealed to the Alabama Supreme Court. Held: (a) Compliance with the Alabama Air Pollution Control Act did not protect defendant from liability for damages caused by pollutants coming from its smelter; (b) the fact that because of its closeness to the lead plant, plaintiffs‘ property had a higher value as commercial property than as residential or farm property did not bar recovery; and (c) if an intrusion interferes with the right to exclusive possession of property, the law of trespass applies but if the intrusion is to the interest in use and enjoyment, the law of nuisance applies (i.e., in this case if there were merely discomfort and annoyance to the plaintiffs, the action would lie in nuisance, whereas if particles accumulated that caused damage to the property itself, then trespass would lie. The court pointed out that both causes of action might be present.) Borland v. Sanders Lead Co., 369 So.2d 523 (1979).
3.
Plaintiff Webb, a developer of a retirement village, brought suit to enjoin as a nuisance Spur Industries‘ operation of a cattle farm and feed lots. When Webb‘s initial development began, the feed lots were already in existence 3 miles away. At time of suit, the two enterprises had expanded to within 500 feet of each other. Held: It was held by the Arizona Supreme Court that a private plaintiff who is barred by the ―coming to the nuisance‖ doctrine may obtain injunctive relief when he is asserting that the nuisance also constitutes a public nuisance. By asserting the right of the residents of his development, Webb has effectively shown the existence of a public nuisance and escaped the ―coming to the nuisance‖ bar. However, the court further held that a developer who is responsible for bringing the public to the 1-333
nuisance so as to require its abatement must also indemnify the party enjoined. Spur Industries, Inc. v. Del E. Webb Development Co., 494 P.2d 700 (1972). V. Sustainability Approaches Emphasize: The Kyoto protocols and the Paris Agreement (including President Trump announcing that the US would withdraw from the treaty). A. Areas of Environmental Concern Emphasize: Lack of unanimous scientific opinion on many environmental issues underscores their great complexity. That the key controversy at the heart of environmental regulation is ―How much certainty of harm is required to justify regulatory intervention?‖ Loss of Natural Ecosystems Discuss: A report signed by 1,575 scientists, including 100 Nobel Prize winners, warned of the effects of worldwide destruction to natural ecosystems, the cutting of rainforests being the most widely publicized destruction. Ozone Emphasize: That in 1990, 59 countries agreed to stop producing certain chemicals that destroy the Earth‘s protective ozone layer of the atmosphere. On the agreement that required participating countries to stop production of certain chlorofluorocarbons and halons by the year 2000. Greenhouse Effect Explain: That overshadowing even ozone destruction as a future pollution concern are increasing atmospheric concentrations of carbon dioxide. Higher carbon dioxide levels will likely lead to warmer global temperatures, the socalled greenhouse effect. Carbon dioxide in the atmosphere has reached its highest concentration in the 1-334
atmosphere in the last 650,000 years. Fifteen percent of the world‘s population uses more than half of its polluting energy. Sidebar 19.4—―Mass Extinction and Its Consequences‖
Additional Matters for Discussion: Scientists have concluded that earth has warmed 1 degree Celsius since 1880, with two-thirds coming since 1975. According to Andrew Dlugolecki, director of general insurance development at CGNU, global losses from natural disasters have been expanding at the rate of 10 percent annually. Population growth is discussed scientifically in ―The Human Numbers Crunch,‖ Janet Ratloff, Science News, 6/22/96, p. 396. It reports that the typical American consumes 10 to 1,000 times more resources than the average person in the Third World. It also observes that divorce in industrialized countries is lowering the average number of people who live in a household, thus increasing the number of households and greatly expanding CO2 production. For a possible environmental catastrophe looming over Europe due to diversion of the Gulf Stream from oceanic warning, see ―The Great Climate Flip-Flop,‖ W. Calvin, Atlantic Monthly (January 1998) p. 47. In 2003, the WSJ wrote that a change in the Gulf Stream could lower temperatures in the northeastern U.S., as well as in northern Europe by an average of 9 degrees. In November 1992 more than 85 nations responsible for 95 percent of the world‘s consumption of chlorofluorocarbons, coolants thought to reduce atmospheric ozone, agreed under the Montreal Protocols to phase out these substances over the next 30 years. B. Corporate Governance and the Environment (LO 19-4) Emphasize: How some shareholders are using the governance process of the annual meeting to bring environmental concerns to the attention of management, boards, and shareholders. That up to a third of the shareholders vote for environmentally-targeted resolutions. Corporate governance concerns have also led to increasing awareness of businesses on the environmental impacts they have; for instance, in annual summaries frequently referred to as sustainability reporting. Sidebar 19.5—―Hershey Commits to Environmental Sustainability‖ C. Private Property and the Environment
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Emphasize: The ―tragedy of the commons.‖ That although private property may protect the environment in some instances, in other cases it may not. That ―property‖ includes the concept of the equal rights of others.
Answers to Review Questions and Problems Government’s Regulations of Itself 1.
The National Environmental Policy Act The firm‘s EIS must be a detailed statement estimating the environmental impact of the proposed action. The discussion must include information on adverse environmental effects that cannot be avoided, any irreversible use of resources necessary, and available alternatives to the action. b) An EIS must be filed if it is a major federal action significantly affecting the quality of the human environment. The group can certainly have standing to challenge the department‘s action. Whether or not it will win will be based on whether cutting 40 acres of timber is a ―major‖ action. a)
2.
Evaluation of Environmental Impact Statements Critics of the EIS process argue that it fails to consider the economic injury caused by abandoning or delaying projects. Other critics maintain that most impact statements are not sufficiently analytical. Also, the environment is often so complex that projections concerning environmental effects amount to little more than guesswork. States are even less capable than the federal government of evaluating complex environmental factors because they lack the expertise to make this evaluation.
Government’s Regulation of Business 3.
The Environmental Protection Agency The EPA coordinates the major federal efforts to regulate business and the environment.
4.
Air Pollution a)
Where air pollution exceeds primary air quality standards, the EPA does not permit new pollution emissions unless the potential polluter can meet the EPA‘s emissions 1-336
offset policy. b)
5.
Akins might try to buy up someone else‘s right to pollute or to clean up its own pollutions in the area by more than the amount emitted from the new facility.
Clean Air Act Today a)
The individual point-source approach requires that each point-source be licensed to emit no more than a set amount of pollutants. b) Under the bubble policy, an entire factory area can be treated as a point-source. This allows the polluter the advantage of deciding how much pollution to put out of each smoke stack under the ―bubble.‖ 6.
Water Pollution The Clean Water Act regulates effluent disposal into a navigable waterway through any point source. A ―navigable waterway‖ is basically any flowing water, including sewers that empty eventually into a larger flow over which vessels can go.
7.
Endangered Species Act The ESA applies to businesses as they cannot transport, trade in, or ―take‖ any endangered species, as specified under law by the Secretary of the Interior, within the United States or on the high seas.
8.
Pesticide Control The company must follow the EPA‘s required registration process.
9.
Solid Waste a)
The states and local communities have the primary responsibility for nontoxic solid waste disposal. b) Concerning solid waste disposal, the Act primarily provides the states with technical and limited financial support. 10. Toxic and Hazardous Substances a)
If the byproducts qualify as ―hazardous‖ under the Natural Resource Conservation and Recovery Act, the manufacturer must dispose of them in an EPA-licensed disposal 1-337
facility. The manifest system must be followed if a transporter carries the byproducts for the manufacturer. b) Ultimately, the Superfund may pay to clean up these waters. Clean-up costs plus punitive damages can be levied against responsible parties in case this happens. Suits by Private Individuals 11. Citizen Enforcement Many of the major federal environmental acts like NEPA, the Clean Air Act, and the Clean Water Act give any private citizen the right to sue the government to enforce the acts. 12. Tort Theories Possible tort causes of action include negligence (unreasonable behavior), ultra-hazardous activity (strict liability), and nuisance (unreasonable use of one‘s property). Sustainability Approaches 13. Areas of Environmental Concern All of the areas of concern discussed in this section—the greenhouse effect, global warming, ozone depletion, and population growth—illustrate that a key controversy at the heart of environmental regulation concerns how much certainty of harm is required to justify regulatory intervention. The answer should emphasize how complex the environment is. Also, one cannot even predict next week‘s weather with much certainty. 14. Corporate Governance and the Environment Shareholder groups have exercised their right to introduce environmentally-related resolutions at the annual meetings of corporations. 15. Private Property and the Environment This quoted phrase means that private parties have been recognized by the state as being owners of a right to pollute a certain amount and that these parties may use, trade, or exchange the pollution ―resources‖ established by this right.
Business Discussion #1
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1.
What environmental laws will apply to the new plant construction? A full range of the environmental laws will apply, especially the Clean Air Act for smoke stack emission standards, the Clean Water Act for point source effluents (if any), and the Endangered Species Act if you might affect such species.
2.
What environmental law will have to be followed as you seek to get the national forest lease? Because one wishes to harvest timber on national forest land, one must follow the requirements of the National Environmental Policy Act.
3.
What steps should you take to maintain good community relations? Primarily, all one can do is to show that one appreciates the impact one will have on the natural environment and explain through public forums and private meetings what one will do to ameliorate it.
Business Discussion #2 1.
Why might you need to know the environmental condition of the land? One needs to know the environmental condition of the land, specifically whether or not there has been toxic dumping on the site, because if there are toxics on the site, U.S. Parts Inc., as owner of the land, can be held responsible under the Superfund for clean-up costs.
2.
What steps might you want to take before buying the land? One might bring in an environmental expert to consult about the condition of the land.
Chapter 20 Employment Discrimination Laws Learning Objectives
The purpose of this chapter is to introduce students to discrimination in employment law. Students should grasp that not only is intentional employment discrimination (disparate 1-339
treatment) often illegal, but also that disparate impact discrimination is illegal when based on race, sex, color, religion, and national origin. Employment discrimination arising from age or disability can also violate the law. By the time they finish the chapter, students should also have an understanding of the steps necessary to prevent unfounded discrimination claims.
References
Bennett-Alexander, Dawn and Hartman, Laura, Employment Law for Business 9th ed., McGraw-Hill (2019). Epstein, Richard A., Forbidden Grounds: The Case Against Employment Discrimination Laws. Cambridge, Mass.: Harvard U. Press (1992). Friedman, Joel W., Employment Discrimination Stories. Foundation Press (2006). Fick, Barbara J., The American Bar Association Guide to Workplace Law, 2nd ed., ABA (2006). Koral, Alan M., Conducting the Lawful Employment Interview. New York: Executive Enterprises Pub. Co. (1986). Mastalir, Roger M., Employment Discrimination: Law and Practice 5th ed., Wolters Kluwer (2020 update). Player, Mack A. and Serpino, Sandra S., Federal Law of Employment Discrimination. 8th ed., West (2017). Salas, Eduardo, and Frank Landy, Employment Discrimination Litigation. Pfeiffer (2005). Steingold, Fred S., The Employer‘s Legal Handbook, 14th ed. Nolo Press 2019). Twomey, David P., Labor and Employment Law, 15th ed., Cengage (2013).
Teaching Outline
I. The Civil Rights Act Of 1964 (LO 20-1) Emphasize: How the Constitution justifies slaves. Also, the fact that all ―men‖ are equal, but the Constitution says nothing about women. To the students how far equality of opportunity, both in employment and elsewhere, has come since the founding of the United States. Underscore that the most important law supporting equal opportunity is the Civil Rights Act of 1964, as amended. A. General Provisions 1-340
Emphasize: That Title VII of the Civil Rights Act of 1964 apply to employers with 15 or more employees, labor unions, and certain other employers. Title VII prohibits job discrimination against employees, job applicants, or union members based on race, color, religion, sex, or national origin. The types of employer actions in which discrimination is prohibited are as follows: discharge; refusal to hire; compensation; promotion; and terms, conditions, or privileges of employment. That employers, employment agencies, and labor unions can discriminate on the basis of religion, sex, or national origin (but not race or color) where these are bona fide occupational qualification (BFOQ). How Title VII applies to employment agencies. That Title VII exemptions exist with respect to laws creating preference for veterans and to hiring based on professionally developed ability tests that are not designed or intended to be used to discriminate. The tests, however, must show a relationship to the job for which they are administered. Additional Matters for Discussion: According to the Tax Policy Center, the median net worth for Hispanic and African American families in 2016 was $$20,720 and $17,150, respectively. These figures are about eight time less than that of the $$171,000 median net worth for white, nonHispanic families. Note that discrimination in employment is not the same thing as being treated badly. For instance, see Frances McMorris, ―Discrimination Is Hard to Prove If a Boss Treats Everyone Badly,‖ WSJ, 3/10/00, p. B1. Observe that everyone has a race, gender, color, religion (or not), and a national origin; thus, every employee is in a potential class that can claim illegal discrimination under Title VII. Cases for Discussion: 1.
Employee won a favorable verdict under Title VII. Employer, who had not raised the issue at trial, then asserted that it had fewer than 15 employees. Held: The ―numerosity‖ issue does not go to subject matter jurisdiction and must be raised at trial to be appealed. Arbaugh v. Y&H Corp., 126 S.Ct. 1235 (2006).
2.
The partners at Price Waterhouse refused to propose Ann Hopkins for partnership. She was described as ―overly aggressive, unduly harsh, difficult to work with and impatient 1-341
with staff.‖ She was also called ―macho‖ and ―unfeminine.‖ Hopkins sued Price Waterhouse for sex discrimination. Held: It was held by the U.S. Supreme Court that when an employment decision is the result of both legitimate and illegitimate motives, the employer bears the burden of proving by the preponderance of the evidence that its legitimate motive, standing alone, would have induced it to make the same decision. Price Waterhouse v. Hopkins, 57 LW 4469 (5/1/89). On remand the federal district court ordered Price Waterhouse to make Ann Hopkins a firm partner. 3.
A United Way employee sued her employer for sex and age discrimination. The employer moved to dismiss, asserting that the charity was not ―engaged in commerce.‖ Held: That the employer is a charitable group does not prevent it from being an ―industry affecting commerce under Title 7 and the ADEA.‖ Martin v. United Way of Erie County, 56 LW 2181 (1987).
B. Enforcement Procedures Empahsize: The creation of the EEOC in 1964. Also explain its composition. The administrative powers of the Equal Employment Opportunity Commission (EEOC). Note the remedies that the EEOC can exercise against a discriminating employer. The 1991 Amendments Emphasize: The 1991 amendments to Title VII that allow recovery of compensatory and punitive damages up to $300,000 per person depending on the size of the employer. That where state agencies begin discrimination proceedings, the EEOC must wait 60 days before it starts action. The importance of an employee filing charges of illegal discrimination with the EEOC within 180 days after the alleged unlawful practice occurred but this is extended to 300 days if the action was first filed with a state agency. Winning a Title VII Civil Action Emphasize: That in proving disparate treatment, the plaintiff must convince the court that the employer intentionally discriminated against the plaintiff and that any alleged 1-342
legitimate reasons for such treatment are a mere pretext for discrimination. That even if a discriminatory policy or practice is job related, a plaintiff may still prove a violation by showing that other selection procedures would serve the employer‘s legitimate interest in picking the right person for the job, without having undesirable discriminatory effects. See Figure 20.1—―What Kinds of Claims are Being Filed with the EEOC?‖
Additional Matters for Discussion: Note that under state law damages can exceed $300,000. Note that the CRA of 1964 did not allow for punitive damages but the 1991 amendments did include punitive damage awards for intentional discrimination. Case 20.1—―Thompson v. North American Stainless, LP, 562 U.S. 170 (2011)‖ Cases for Discussion: 1.
In Folstad v. American Dental Association, 527 U.S. 526 (1999), the Court ruled that the conduct justifying punitive damages under Title VII must be ―intentional‖ and done ―with malice or with reckless indifference to federally protected rights‖ but need not be ―egregious.‖ The Court, however, asserted that for an employer to be liable for punitives the employee must successfully impute liability to the employer under agency law and that the employer cannot be held vicariously liable for discriminatory decisions of managerial agents where those decisions are contrary to the employer‘s good faith efforts to comply with Title VII.
2.
In West v. Gibson, 119 S.Ct. 1906 (1999), the Court ruled that the EEOC has authority under Title VII to award compensatory damages against federal agencies in employment discrimination cases.
3.
In Watson v. Fort Worth Bank & Trust, 108 S.Ct. 2777 (1988), the Court considered the case of Clara Watson who had sued her employer after being denied four different promotions based on ―subjective promotion policies.‖ The Court ruled that subjective policies could be measured according to standard disparate impact rules.
C. Discrimination on the Basis of Race or Color (LO 20-2) Emphasize: That the primary objective of the Civil Rights Act of 1964 was the integration of African Americans into the mainstream of American society. That Title VII prohibits discriminatory employment practices based on race or color that involve recruiting, hiring, promotion, discharge, or application of the terms and 1-343
conditions of employment. That Title VII applies to discriminatory employment conditions and benefits. Sidebar 20.1—―Hithon v. Tyson Foods, Inc.: The Use of the Word ―Boy‖‖
Additional Matters for Discussion: In a 1991 study conducted by the Urban Institute, black and white college students matched for age, speech, demeanor, and physical build, and with identical resumes, visited personnel offices in Chicago and Washington, D.C., to apply for 576 entry-level jobs that had been advertised. In 20 percent of the cases the white applicant progressed further in the hiring process than did the black. In only 7 percent of the cases did the black applicant progress further. The Economic Policy Institute stated that in 2019 black workers were twice as likely to be unemployed as white workers (6.4% to 3.1%). When they are employed, black workers with a college or advanced degree are more likely than their white counterparts to be underemployed when it comes to their skill level—almost 40% are in a job that typically does not require a college degree, compared with 31% of white college grads. Cases for Discussion: 1.
A light-skinned clerk typist with the IRS complained that her dark-skinned supervisor fired her because of her skin color. Held: The discharge is actionable under Title VII. Walker v. Internal Revenue Service (DC NGa 5/11/89).
2.
A municipal ordinance required applicants for firefighter and police jobs to have three years‘ municipal residency. Held: Title VII would be violated if the municipality had virtually no black residents and the ordinance had an unlawful disparate impact on black job applicants from nearby towns. U.S. v. Town of Cicero, 54 LW 2511 (CA 7, 1986).
3.
A judge terminated a black court reporter because he wished to hire a white reporter with whom he had worked successfully in the past. The black reporter sued. Held: It was by CA7 that the judge‘s decision was based on a legitimate, nondiscriminatory reason. McMillian v. Snetanoff, 50 FEP Cases 137 (1989).
4.
Case 20.2—―Ricci v. DeStafano, 557 U.S. 557 (2009)‖
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D. Discrimination on the Basis of National Origin Emphasize: That discrimination concerning the speaking of a native language is a frequent source of national origin lawsuits. The potential for Title VII suits arising because foreign companies investing in the United States often prefer their own nationals in management positions. Sidebar 20.2—―Abercrombie & Fitch‘s $40 Million Diversity Lesson‖ Sidebar 20.3—―National Origin Discrimination: Problematic Ethnic Slurs‖ Additional Matters for Discussion: Numerous national origin lawsuits are filed yearly against employers because of English-only job requirements. In 1996 there were 91 such cases. Discrimination by Japanese companies that have incorporated U.S. subsidiaries is discussed in ―White People, Black People Not Wanted Here,‖ Business Week, July 10, 1989, p.31. When Congress passed the 1986 Immigration Reform and Control Act, it was concerned that the act‘s regulation of employer‘s hiring of illegal aliens would cause job discrimination against foreign-looking job applicants. Congress thus created a special counsel for immigration-related unfair employment practices. The first case brought by the special counsel accused Mesa Airlines of discriminating against noncitizens to fill pilot‘s jobs. Cases for Discussion: 1.
A job applicant placed high enough on a civil service test to be selected for a clerk‘s position. He was not selected due to a perceived deficiency in job-related oral communications skills because of a ―heavy Filipino‖ accent. He sued, alleging national origin discrimination. Held: It was held by CA9 that the employer was motivated exclusively by business necessity. Fragante v. City and County of Honolulu, 58 LW 2281 (1989).
2.
A federal district judge found Quasar, a unit of Matsushiti Electric, guilty of racial discrimination in the discharge of 66 American managers—but no Japanese managers. Quasar, ordered to pay $2.5 million, indicated that it would appeal.
E. Discrimination on the Basis of Religion Emphasize: 1-345
That religious corporations, associations, or societies can discriminate in all their employment practices on the basis of religion, but not on the basis of race, color, sex, or national origin. That the Supreme Court has stated that employers must make reasonable accommodation to the religious needs of their workers in order not to be guilty of illegal discrimination. Sidebar 20.4—―Workplace Discrimination against Muslims‖
Additional Matters for Discussion: When a 6th grade teacher at a religious school did not have her contract renewed because she was pregnant and single, she sued. The Sixth Circuit ruled in 2000 that although a religious organization could have a policy against pre-marital sex, it could not discriminate between genders. A ban enforced only by observing which single female teachers became pregnant violated Title VII. Rent-A-Center Inc. agreed in 2000 to pay job applications who were asked about their religious views $2 million. Employee training programs drawing on a variety of sources, from Eastern mysticism to positive thinking, have prompted Title VII complaints by employees who do not wish to attend the programs for religious reasons. In Trans World Airlines, Inc. v. Hardison, 97 S.Ct. 2264 (1977), the Supreme Court ruled that the ―duty to accommodate‖ does not take precedence over a valid collective bargaining agreement. The employee‘s demands not to have to work on Saturday placed an undue burden on other employees and on the employer. Cases for Discussion: 1.
A school teacher‘s religious beliefs required that he miss several days of school. The school board proposed that the employee be docked his full pay during these absences, whereas the employee proposed that he pay only what it would take to get a substitute teacher during these days. Held: The employer need make only a ―reasonable‖ effort to accommodate an employee‘s religion and need not adopt the employee‘s advice on how to do it. Ansonia Board of Education v. Philbrook (S. Ct. 1986).
2.
A Philadelphia school board refused to allow a public school teacher to wear religious attire while teaching. The refusal was based on the Pennsylvania Garb Statute that states ―no teacher in any public school shall wear... any dress, mark, emblem, or insignia indicating that such teacher is a member... of any religious... denomination.‖ Violation of the statute was a crime. The teacher sued under Title VII. 1-346
Held: It was held by CA3 that ―We think it would be an undue hardship to require a school board to violate an apparently valid criminal statute.‖ U.S. v. Board of Education for the School District of Philadelphia, 8/9/90. 3.
Consider the following cases on the reasonableness of accommodation of an employee‘s religion: Accommodation is satisfied by soliciting volunteers before assigning an objecting employee to a Sunday work shift. EEOC v. Ithaca Industries, 56 LW 2181 (CA 4, 1987). Accommodation is not satisfied by an employer who refused to help find work shift replacements for an employee whose beliefs prohibit him from working on Sunday or from personally soliciting replacement workers. Smith v. Pyro Mining Co., 56 LW 2156 (CA 6, 1987). Accommodation is not satisfied for a worker who was discharged for failing to answer the phone ―Merry Christmas.‖ Kentucky Commission on Human Rights v. Lesco Manufacturing & Design Co. (1987).
4.
The Postal Service offered to transfer two clerks whose religious beliefs prevented them from handling draft registration forms. The clerks proposed referring draft registrants to other clerks and keeping their positions. The Service refused, and the clerks sued. Held: Title VII permits the employer to implement its own ―reasonable accommodation‖ that eliminates the religious conflict and reasonably preserves employment status. American Postal Workers Union v. Postmaster General, (CA 9, 1/31/86).
F. Discrimination on the Basis of Sex Emphasize: That many state laws that supposedly were designed to protect women are preempted by Title VII as constituting discrimination in employment. That classifying jobs as male or female is prohibited. That a BFOQ may allow selective hiring; however, it must be related to job performance and not customer or other preferences. Sidebar 20.5—―Women in Business: A Tough Go for Many‖ Case for Discussion: 1. Clayton County, Georgia, fired Gerald Bostock for conduct ―unbecoming‖ a county employee shortly after he began participating in a gay recreational softball league. Held: An employer who fires an individual merely for being gay or transgender violates 1-347
Title VII, Bostock v. Clayton County, Georgia, 590 U.S.
(2020).
Sexual Harassment Emphasize: That a common type of illegal sex discrimination in the workplace is sexual harassment. Hostile work environment constitutes offensive conduct which may include comments, suggestive touching, showing nude pictures, telling offensive sexually based jokes, drawing offensive graffiti and other offensive acts. Employer’s Defense to Hostile Environment Explain: That under agency law, the employer is liable for the acts of their supervisors. That the employer can defend itself by proving that it exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and the plaintiff employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer. That the complained of conduct must be severe and pervasive. Sidebar 20.6—―Sexual Harassment in the Workplace‖ The employer must know about the offensive behavior and must take reasonable steps to prevent it. Pregnancy Discrimination Act Emphasize: That the Pregnancy Discrimination Act amended the Civil Rights Act in 1978. That the law covers both unmarried and married pregnant women. Employers with health plans must cover pregnancies. That men can be victims as well as women. Sidebar 20.7—―Pregnancy Discrimination: Claims on the Rise‖ Equal Pay Act Emphasize: That the Act is administered by the EEOC. That Equal work does not mean identical work; it means ―substantially equal‖ work. The Supreme Court has ruled that discriminatory male and female pay differences 1-348
can also be illegal under Title VII. Comparable worth standards are highly controversial and courts have not agreed in its application. Sidebar 20.8—―Did the Supreme Court get it Wrong? Legislative Action PostLedbetter‖
Sexual Orientation Discrimination Emphasize: The word sex in Title VII only applies to gender, whether someone is female or male. Why many major companies have included protection in their company policies. Sidebar 20.9—―Sexual Orientation Discrimination‖ Case for Discussion: 1. Clayton County, Georgia, fired Gerald Bostock for conduct ―unbecoming‖ a county employee shortly after he began participating in a gay recreational softball league. Held: An employer who fires an individual merely for being gay or transgender violates Title VII, Bostock v. Clayton County, Georgia, 590 U.S. (2020).
Additional Matters for Discussion: In 2019, the EEOC reported nearly 13,000 sexual harassment cases. In 1999, Mitsubishi settled a sexual harassment lawsuit brought by 450 women for $34 million. In 1987 Home Depot agreed to pay $87.5 million to settle a class-action sex discrimination lawsuit. As an example of what companies are doing to prevent sexual harassment on the job, Honeywell has an education program with role playing and films. Its handbook gives the following specific examples of sexual harassment: a. Verbal Harassment: o Using language of a sexual nature o Whistling at someone, cat calls o Making sexual comments about a person‘s body o Making sexual comments, innuendoes, or kissing sounds, howling, etc... o Turning work discussions into sexual topics o Telling sexual jokes or stories o Asking or telling about sexual fantasies, preferences or history o Making unwanted sexual compliments, innuendoes or suggestions 1-349
o Telling lies or spreading rumors about a person‘s sex life b. Non-verbal Harassment: o Looking a person up and down in a suggestive fashion o Staring at a person o Blocking a person‘s path o Following the person o Giving unwanted personal gifts o Displaying sexually suggestive visual materials. c. Physical Harassment: o Giving an unwanted massage around the neck, shoulders, or back o Unwanted touching of a person‘s clothing, hair, or body o Touching and/or rubbing oneself sexually around another person o Standing close or brushing up against a person Steps are also being taken to deal with job-related sexual harassment in other countries. For example, in France it is a criminal offense punishable by up to one year imprisonment and/or a fine of up to $16,000 to ―solicit by order, constraint or pressure favors of a sexual nature‖ from an office subordinate. And in one of the first cases of its kind in Japan, a district court judge awarded a female reporter $12,400 in damages due to sexual harassment of her male editor. The award was made in April, 1992.
Cases for Discussion: 1.
In Burlington Industries, Inc. v. Ellerth, 1998 U.S. LEXIS 4217, the Court ruled that when the plaintiff had been harassed sexually by a supervisor but no tangible job consequences followed (e.g., firing, etc.), the employer may be liable under respondent superior analysis unless the employer can prove that it took reasonable care to prevent or promptly correct harassment and that the employee unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer.
2.
Improper touching and comments by a supervisor cannot be the basis for liability against the employer unless the hostile environment is so pervasive as to establish constructive knowledge (absent actual knowledge) of harassment. Faragher v. Boca Raton, 65 LW 2701 (1997).
3.
Kerry Ellison worked for the IRS. Sterling Grey, fellow trainee, began to ask her out and to write to her. Eventually, Grey was transferred because of his unwelcomed attentions to Ellison. Then Grey was transferred back upon his promise to leave Ellison alone. However, his attentions continued and Ellison filed a complaint.
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Held: It was held by CA9 that Grey‘s conduct was sufficiently severe and pervasive to alter the conditions of Ellison‘s employment and create an abusive working environment. A ―female employee ... states a prima facie case of hostile environment sexual harassment by alleging conduct that a reasonable woman would consider sufficiently severe or pervasive to alter conditions of employment. .. ‖ Ellison v. Brady, 54 FEP Cases 1346 (1991). 4.
A women‘s health club refused to hire men as managers and instructors. It asserted that its customers had chosen an all-female club. It presented a petition signed by some members that stated that their privacy rights would be violated by male employees. Held: The club failed to show a valid BFOQ. The club did not prove that customers would not patronize the club if men were hired. EEOC v. Sedita, 55 FEP Cases 77 (1991).
5.
Lower courts have disagreed over whether displays of pornographic materials alone constitute sexual harassment in the workplace. See, e.g., Rabidue v. Osceola Refining Co., 805 F.2d 611 (1986) (does not constitute sexual harassment); Barbetta v. Chemlawn Services Corp., 44 FEP Cases 1563 (1987) (can constitute sexual harassment).
6.
A girl‘s club offered programs to help girls between the ages of 8 and 18 maximize their ―life opportunities.‖ A ―role model‖ rule prohibited employment of pregnant, single employees. A black single employee was discharged due to her pregnancy. She sued under Title VII. Held: Although the role model rule has a disparate impact, it is a justifiable BFOQ. Chambers v. Omaha Girls Club, Inc., 56 LW 2339 (CA 8, 1987).
7.
The EEOC filed suit against a school district for paying male and female coaches unequally. Held: Although the coaching of boys and girls tennis teams and boys and girls hardball and softball teams are sufficiently ―equal work‖ under the Equal Pay Act, the coaching of girls basketball and boys track, and boys soccer and girls basketball is not ―equal work.‖ EEOC v. Madison School District, 55 LW 2644 (CA 7, 1987).
8.
The Eleventh Circuit has upheld a lower court decision that a trucking company‘s rule requiring job applicants to have at least one year of over-the-road driving 1-351
experience had a disparate impact on women and violated Title VII. Kilgo v. Bowman Transportation, 40 FEPC 1414 (1986). 9.
The Seventh Circuit ruled that pay increases granted to women under a formula to rectify prior discrimination was a ―differential based on the other factor other than sex‖ and thus did not violate the Equal Pay Act. Ende v. Board of Regents of Regency Universities, 53 LW 2499 (1985).
10. In 1998 a federal judge granted summary judgment in favor of the defendant President Clinton in a sexual harassment case brought by Paula Jones. The judge ruled that the President‘s conduct as alleged was neither severe, pervasive, nor outrageous enough to violate Title VII or state common law. II. Employment Practices That May Be Challenged (LO 20-3) A. Questionnaires, Interviews, Testing, and Educational Requirements Emphasize: That employers have used a number of tools to help them find the right person for the right job. Among these tools are questionnaires, interviews, references, minimum educational requirements (such as a high school diploma), and personnel tests. The concepts of race norming, and, how Title VII has affected the use of personnel tests in the employment selection process. That some companies have eliminated or reduced testing due to Title VII. B. Height and Weight Requirements Emphasize: How job-mandated height and weight requirements often result in disparate impact situations. Case for Discussion: 1.
A class action suit against Northwest Airlines claimed that its 5-foot 2 1/2- inch height requirement for flight attendants has a disparate impact on women, Asians, and Hispanics. Northwest argued that the height requirement was required to enable its attendants to reach all equipment necessary for performance of their job. The case was settled but provides a good example of a desperate impact claim and the business necessity defense.
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C. Appearance Requirements Emphasize: That policies regulating hair length of males or prohibiting beards or mustaches have been among the most common. That it is unclear whether or not certain company-mandated appearance requirements that have disparate impact are legal or illegal, since there have been rulings both ways. The employer‘s defense to an appearance policy is to show a business necessity. Appearance requirements can often lead to race or religious discrimination claims. D. Affirmative Action Programs and Reverse Discrimination Emphasize: The origin of the Office of Federal Contract Compliance Programs. Also the fact that this office is the center of affirmative action in federal contracts with private employers. That the affirmative action requirement means that federally contracting employers must actively recruit members of minority groups being underused in the workforce. Private Employer Affirmative Action Explain: That affirmative action programs may lead to charges of reverse discrimination. Discuss the legality of affirmative programs in light of United Steelworkers of America v. Weber. That government-imposed affirmative action plans are subject to strict judicial scrutiny under equal protection guarantees of the Fifth and Fourteenth Amendments. That the 1991 amendments to Title VII specifically prohibit the setting of quotas. Additional Matter for Discussion: A conservative view of affirmative action may be found in the symposium issue of Commentary, March 1998. A more liberal evaluation is Rosen, ―Damage Control,‖ New Yorker, 2/23/98. Cases for Discussion: 1.
In Johnson v. Santa Clara County Transportation Agency, 55 L.W. 4379 (1987), the Court ruled that a valid voluntary affirmative action plan was a non-discriminatory reason justifying employment discrimination against a white male. It also said that a voluntary affirmative action plan was justified by showing that a protected class was 1-353
significantly underrepresented in a job category. 2.
In 1995 the Supreme Court ruled that the equal protection required in federal law by the Fifth Amendment‘s due process clause mandated that all race-based federal action must pass strict scrutiny, i.e., be narrowly tailored to achieve a compelling interest. However, the Court specifically rejected that strict scrutiny was ―strict in theory but fatal in fact.‖ Adarand v. Pena, 515 U.S. 200 (1995).
3.
In its 1990 decision of Metro Broadcasting Inc. v. FCC the Supreme Court ruled for the first time that Congress may authorize affirmative action, not simply to remedy the effects of prior discrimination, but to promote other goals, such as racial and ethnic diversity. The case did not involve Title VII, however.
4.
The City of Richmond, Va., adopted a plan requiring prime contractors of city construction contracts to subcontract at least 30 percent of the dollar amount of each contract to a minority business enterprise. A contractor challenged the constitutionality of the city‘s plan. Held: It was held by the U.S. Supreme Court that a generalized assertion that there has been past discrimination cannot justify the city‘s unyielding racial quota. Since the city has failed to establish a compelling state interest, the plan violates the Equal Protection Clause. City of Richmond v. J.A. Croson Co. (1/23/89). This decision will force the 36 states and 190 cities and counties with similar programs to reevaluate them. The decision does not apply to private employers.
5.
In 1981 Birmingham, Alabama, agreed to settle a 1974 suit against the city by the NAACP by putting into place a court-approved affirmative action plan that provided for the hiring and promotion of blacks in the fire department. In 1982 a group of seven white firefighters challenged the plan, alleging unlawful discrimination. Held: It was held by the U.S. Supreme Court that the district court‘s ruling that the firefighters had no right to challenge the plan after it had been put into effect is overruled. Martin v. Wilks (6/12/89). This decision could mean that affirmative action plans which cities have had in place for years could be challenged.
6.
The Supreme Court has held that Title VII does not preclude entry of a consent decree to benefit persons who were not actual victims of discrimination. Further, even though Title VII may preclude certain race-conscious relief after trial, it does not apply to such relief in a consent decree. The case arose out of a class action filed by black and Hispanic firefighters against the city of Cleveland. Local Number 93 v. 1-354
City of Cleveland, 54 LW 5005 (1986). 7.
Although unrelated to employment, an interesting case upholding California‘s controversial Proposition 209, which abolished state affirmative action programs, is Coalition for Economic Equality v. Wilson, 122 F.3d 692 (1997).
E. Seniority Systems Emphasize: How seniority systems give priority to those employees who have worked longer for a particular employer or in a particular line of employment of the employer. That the Civil Rights Act does not prohibit employment discrimination pursuant to a bona fide seniority system if the discrimination is not the result of an intent to discriminate. The mentioned case of Memphis Fire Dept. v. Stotts. III. Other Statutes and Discrimination in Employment (LO 20-4) A. Civil Rights Act of 1866 Emphasize: That Section 1981 of the Civil Rights Act of 1866 prohibits racial discrimination in the making of contracts. Discuss the potential advantages of using Section 1981 over Title VII in bringing a private discrimination suit and how these advantages are lessened since the 1991 amendments to Title VII. Unlimited Damages Emphasize: What ―race‖ implies under the Civil Rights Act. That unlimited compensatory and punitive damages are available under Section 1981 of the act. The mentioned case of Patterson v. McLean. Case for Discussion: 1.
Brenda Patterson alleged that her McLean Credit Union boss assigned her sweeping and dusting chores not given to white co-workers and did not promote her. She asserted racial harassment and sued for damages under Section 1981. 1-355
Held: It was held by the U.S. Supreme Court that the 1866 Civil Rights Act does not apply to racial harassment after a person is hired. Patterson v. McLean Credit Union, 491 U.S. 164 (1989). The Court refused to overturn its 1976 ruling that the Act forbids discrimination in the making of private employment contracts. Interestingly, on remand the district court ruled that a failure to give Patterson the promotion was not discrimination in terms or conditions of employment, but was discrimination in creation of a new and distinct contractual relationship. Note also that the 1991 amendments to Title VII specifically apply Section 1981 to the terms and conditions of contracts. B. Discrimination on the Basis of Age Emphasize: That the Age Discrimination in Employment Act (ADEA) prohibits job discrimination against persons over forty years old on account of their age, and it also prohibits the mandatory retirement of these employees. Explain the limited exceptions. That ―bona fide executives‖ and ―high policy makers‖ of private companies who will have pensions of at least $44,000 per year are not covered under the act. That the ADEA applies to employers with 20 or more employees. Types of Age Discrimination Explain: The ADEA recognizes both disparate treatment and disparate impact discrimination for employers with 20 or more employees. The Supreme Court has also stated that the ADEA recognizes disparate impact in age discrimination cases. However, the Supreme Court stated that disparate impact alone did not prove illegality under the ADEA. Sidebar 20.10—―Did You Read the Law? A Law Firm Runs Afoul of the ADEA‖ Employer Defenses in ADEA Cases Emphasize: That the employer defenses to age discrimination, disparate treatment, and disparate impact differ slightly from the defense in Title VII cases. That under the ADEA age is seldom recognized as the basis for a bona fide occupational qualification. The ADEA also does not require the employer to prove a ―business necessity‖ in 1-356
order to successfully defend an age discrimination case of disparate impact. Remedies under the ADEA Explain: That that willful violations of the act permit discrimination victims to be awarded double damages. An important exception to this general rule about remedies against state actors under the ADEA. That This Eleventh Amendment immunity for states in federal court has been extended to other employment laws, including the Americans with Disabilities Act and the Family Medical Leave Act. Additional Matters for Discussion‖ The employer (City of Jackson) gave larger percentage pay raises to lower echelon police officers—who were also younger—than it did to older, more senior officers in order to bring their salaries in line with those of surrounding towns. Held: No violation of ADEA since the decision was based on a reasonable factor other than age given the permissible goal of keeping employees. Smith v. City of Jackson, 544 U.S. 228 (2005). According to EEOC statistics, discrimination cases are shifting toward ADEA issues. In 1982 national ADEA cases totaled 8,989, which represented 13.4 percent of all discrimination cases. By 1989 the figures were 19,427 and 27.4 percent, respectively. In 1996, over 34,000 complaints were filed. Cases for Discussion: 1.
In Kimel v. Florida Bd. of Regents, 120 S.Ct. 631 (2000), the Court ruled that the ADEA did not validly abrogate the States‘ sovereign immunity to age lawsuits. However, many state statutes do.
2.
In O‘Conner v. Consolidated Coin Caterers Corp., 517 U.S. 308 (1996), the Court held that the ADEA prohibited an employer from discriminating in favor of a younger employee even if the younger employee was over 40.
3.
City firefighters brought suit against the city of Baltimore alleging ADEA violation. The city required firefighters to retire at age 55. The city claimed BFOQ and pointed to federal law requiring federal firefighters to retire at age 55. Held: The Supreme Court ruled that a federal law not found in ADEA and applying only to some federal employees does not establish a BFOQ for nonfederal employees. 1-357
Johnson v. City of Baltimore, 105 S.Ct. 2717 (1985). 4.
A 60-year old printing manager with more than 30 years experience in the printing industry was told that he was ―overqualified‖ for some 32 positions within his company, which he had applied for when his own company division was closed down. He sued. Held: It was held by CA2 that ―Denying employment to an older job applicant because he or she has too much experience ... is simply to employ a euphemism to mask the real reason for refusal, namely, in the eyes of the employer the applicant is too old.‖ A reasonable juror could find illegal discrimination on these facts. Taggart v. Time, Inc., 1/24/91.
5.
An employer decided to reduce its selling force and offered early retirement to salespersons over age 55. The employees had two months to consider the offer. Several who accepted the offer later sued under ADEA. Held: There was no coercion to retire. The affected employees were merely being given an alternative to continued employment. They had two months to consider the offer. ADEA is not violated. Henn v. National Geographic Society, 55 LW 2674 (CA 7, 1987). This case distinguishes Paolillo v. Dresser Industries, 813 F.2d 583 (CA 2, 1987) which held that every retirement under an early retirement offer creates a prima facie case of age discrimination.
6.
A discharged 59-year-old employee signed a consulting contract with the defendant employer. The contract contained a waiver of ADEA rights. When the contract expired, the former employee sued for age discrimination. Held: ADEA rights cannot be waived by an unsupervised release. Runyan v. National Cash Register Corp., 53 LW 2563 (1985). In EEOC v. Cosmair, Inc., 56 LW 2059 (CA 5, 1987) the court ruled that an employee could not waive his right to file a charge against an employer under ADEA. Therefore the employer acted illegally in stopping severance payments.
C. Discrimination on the Basis of Disabilities Emphasize: The passage of the Americans with Disabilities Act of 1990 and 2008 amendments. The final regulations that were passed in 2011 expanding the ADA to a broader group. That a disability is ―any physical or mental impairment that substantially limits one or 1-358
more of an individual‘s major life activities.‖ That homosexuality, sexual behavior disorders, compulsive gambling, kleptomania, and disorders resulting from current drug or alcohol use are not protected disabilities. The meaning of ―qualified disabled.‖ Reasonable Accommodation under the ADA Discuss: What a ―reasonable accommodation‖ includes. The definition of ―undue hardship.‖ Sidebar 20.11—―Chipotle Mexican Grill: Must Accommodate Disabled Patrons‖ Remedies under the ADA Explain: That the remedies under the ADA are basically the same remedies available under the Civil Rights Act, including hiring, reinstatement, back pay, front pay, injunctive relief, and compensatory and punitive damages. The ADA replaces the Rehabilitation Act of 1973 as the primary federal law protecting the disabled in private sector employment. Additional Matters for Discussion: In Atlanta a nude dance club was ordered by a federal jury to pay $350,000 to a bartender who was fired for testing positive to the HIV virus. Although the ADA does not prohibit sexual orientation discrimination, as of 1997 at least 11 states and the District of Columbia did by state law. The states include California, Connecticut, Hawaii, Massachusetts, Minnesota, New Jersey, Rhode Island, Vermont, Wisconsin, Maine, and New Hampshire. Also, hundreds of U.S. corporations prohibit such discrimination. National legislation has been sponsored as of this writing. Discuss the fact that the ADA is much more detailed than Title VII and that Congress hoped to reduce litigation by specifying details of the ADA. State courts in at least five states have ruled that drug abuse and alcoholism are considered disabilities under state law. Contrast this position with what the ADA says. Employers‘ use of employees‘ old accident records to blacklist them from new employment may bring ADA claims. There is also concern that ADA claims may follow after workers‘ compensation claims if employers will not take back injured workers. Companies that use generic screening to cull out prospective employees may find 1-359
this practice forbidden by ADA. D. Genetic Discrimination Emphasize: The protections offered by the Genetic Information Nondiscrimination Act (GINA). The term ―covered employers.‖ The practices which are lawful and unlawful. The EEOC final regulations published in 2011. Sidebar 20.12—―Protecting against Inadvertent Acquisition of Medical Information in Violation of GINA‖ E. Discrimination in Getting and Keeping Health Insurance Emphasize: The Health Insurance Portability and Accountability Act. The act primarily prevents discrimination against individual employees in small businesses. That the Act prohibits insurers from discriminating against group plan members (employees) based on medical condition. That the Act guarantees that insured employees who leave an old employer for a new one will be able to get health insurance with the new employer. F. Other Federal Legislation Emphasize: That the National Labor Relations Board has ruled that appeals to racial prejudice in a collective bargaining representation election constitute an unfair labor practice. The obligations of the employer in a collective bargaining arrangement. How the NLRB and FCC and other federal agencies help in controlling discrimination in employment. G. State Anti-Discrimination Laws (LO 20-5) Emphasize: That federal laws concerning equal employment opportunity specifically permit state laws that impose additional duties and liabilities on employers. If employment agencies or labor organizations discriminate against an individual in any way because of one of these reasons, they are also guilty of an unfair employment practice. 1-360
State and local laws often protect categories of persons not protected by federal law.
Additional Matter for Discussion: Note that a number of states and cities prohibit discrimination based on gender orientation. By 2000, some 3500 companies offered ―domestic partner‖ benefits without regard to gender orientation. These companies included American Express, Boeing, Chase Manhatten, Coca-Cola, IBM, and the Big Three auto manufacturers are included in that number. H. Trends in Employment Discrimination and Litigation Emphasize: The role of managers in dealing with employment discrimination and litigation. Surge in Private Lawsuits Discuss: Factors encouraging employees to sue their employers. How increasing numbers of baby boomers is forcing managers to learn more about anti-discrimination measures. Sidebar 20.13—―Is it Important to Investors if the CEO Is a Man or a Woman?‖ Arbitration in Employment Discrimination Disputes Describe: Arbitration is usually cheaper, quicker, and less public than litigation. The current confusion over arbitration in the employment relationship. Mention the decision in Circuit City Stores, Inc. v. Adams. Proper arbitration agreements should continue to be considered as a business response to litigation of employment disputes. Insuring against Employment Discrimination Claims Explain: That the general liability policies carried by many businesses, which cover bodily injury and property damage, often do not insure against intentional torts. The growing prevalence of insurance policies that insures employers against discrimination lawsuits. How corporate governance relates to employment discrimination and how antidiscrimination laws fit into a property-based legal system. 1-361
Additional Matters for Discussion: An American Management Association survey found a number of employers who admit discriminating against employees based on genetic testing.
Answers to Review Questions and Problems
The Civil Rights Act of 1964 1.
General Provisions a) A violation of Title VII has occurred. b) Martel must file a complaint with the EEOC within 180 days of the alleged discrimination, or he will lose his rights under Title VII. The 180 calendar day filing deadline is extended to 300 calendar days if a state or local agency enforces a law that prohibits employment discrimination on the same basis.
2.
Enforcement Procedures Depending on the court and specific facts adduced, students would be able to argue either way on this problem. Numerous cases have held that customer preference as to gender do not provide the basis for a BFOQ claim. If a business necessity is proven, the employer can still get away with a certain level of discrimination.
3.
Discrimination on the Basis of Race or Color Yes. The law does not just protect minority races. There are numerous Title VII cases concerning discrimination against white employees.
4.
Discrimination on the Basis of National Origin Some courts have held that if jobs require contact with the public, a requirement that employees speak some English may be a business necessity. Therefore, unless Ace can show that speaking English is job related as, e.g., when employees must interact with Englishspeaking customers or must be able to speak English for safety reasons, they may not be held accountable for the said policy.
5.
Discrimination on the Basis of Religion 1-362
The Supreme Court has ruled that employers must make ―reasonable accommodations‖ to employees‘ religious observances under Title VII. In this particular instance it is unlikely that the employer will be required to accommodate Ortega, since the employer is not open ten hours a day, and juggling the work schedule may be too difficult. 6.
Discrimination on the Basis of Sex Yes, the employer must take immediate steps to correct the hostile work environment or risk Title VII liability, failing which a lawsuit may be brought upon the employer.
Employment Practices That May Be Challenged
7.
Questionnaires, Interviews, Testing, and Educational Requirements A test that has the effect of discriminating against one of the groups covered under the Civil Rights Act is not prohibited under the act if it is job related. In this case it may be difficult for Jennings to prove how a mathematical aptitude test is related to assembly line performance. In any event, Jennings will have violated Title VII if a less discriminatory test of assembly line potential performance is available.
8.
Height and Weight Requirements a)
Unless the employer can establish that height is a BFOQ (and it probably cannot under these facts), its height policy has disparate gender, ethnic, and racial impact and violates Title VII. b) Punitive and compensatory damages are not available in this case unless a plaintiff can prove intentional discrimination. Technically, waiting tables can be done by anybody, regardless of height. Therefore, unless the recruiter can prove otherwise, for business reasons, a suit can be brought upon them. 9.
Appearance Requirements The answer should discuss the possibility of litigation over the employer treating males and females differently, and, also, the possibility of there being racial or ethnic differences in the way male hair is normally worn.
10. Affirmative Action Programs and Reverse Discrimination 1-363
The facts in this problem resemble those in the Weber case. Under these facts Kartel has not likely violated the law unless they fire or replace an already existing employee to accommodate an African American applicant in the said position. 11. Seniority Systems Yes, as long as the seniority systems were not set up with the intention of violating Title VII.
Other Statutes and Discrimination in Employment
12. Civil Rights Act of 1866 The primary advantage to the Civil Rights Act of 1866 is that under it there are no limits on recoverable damages. Also, the 1866 law does not require an employee to go through the EEOC before filing a lawsuit. 13. Discrimination on the Basis of Age The age discrimination here is not illegal since the ADEA does not apply to individuals who receive a pension greater than $27,000 annually. 14. Discrimination on the Basis of Disabilities The company has probably acted illegally under the Americans with Disabilities Act (ADA). Ralph is a ―qualified disabled‖ person. Since he has HIV it makes him a disabled person as it substantially impairs a major life activity, like holding a job. Therefore, discharging him is in direct contravention to the ADA. 15. Genetic Discrimination The Genetic Information Nondiscrimination Act (GINA) covers tests for genes that cause various cancers, specifically, breast and colon cancers. Therefore, in a legal suit, Amy can actually claim violation of rights under GINA. 16. Discrimination in Getting and Keeping Health Insurance Because Title VII only applies to employers, not to insurance companies who control employee health insurance coverage. 1-364
17. Other Federal Legislation Yes, because these issues involve ―terms and conditions of employment that are mandatory bargaining issues for employers under federal labor law.‖ 18. State Antidiscrimination Laws State laws often reach discrimination that is not reached by federal law (e.g., in situations where employers have fewer than 15 employees, which Title VII does not reach). 19. Trends in Employment Discrimination and Litigation Yes, but the employer must be sure to give consideration to the employee for the employee‘s promise to arbitrate.
Business Discussion #1 1.
What are Maria’s legal rights in this situation? Maria has a right to employment without a hostile working environment. She can file a claim against her employer with the EEOC or relevant state fair employment practices commission.
2.
What would you do if you were the site manager? This is a subjective question. Ideally, the manager should notify the proper authorities in the company hierarchy and then promptly investigate the validity of Maria‘s claims. If the claims are valid, the manager must take immediate action to end the hostile environment without penalizing Maria in any way.
3.
Do you think Maria should just try to “fit in?” Students‘ answers may vary, but she certainly does not have to do so.
Business Discussion #2 1.
Does the height, weight, age, and education policy discriminate illegally? 1-365
Yes, because it has a likely disparate impact based on gender, race, and national origin. The business necessity for this policy does not appear narrowly targeted enough. Various strength, reading, or other skills testing are available and would discriminate less. 2.
How would you change the policy? Through the BFOQ skills testing mentioned above.
3.
If your customers prefer male drivers, does their preference mean that the company can hire only males as drivers? No, customer preference provides no ground for otherwise illegal discrimination.
Chapter 21 Employer Responsibilities and Employee Rights - Employment Laws Learning Objectives
The purpose of this chapter is to introduce the students to basic employment issues. The employment at will doctrine is explained as well as issues related to workplace privacy and workers‘ compensation laws. Finally, the responsibilities that an employer must undertake to document employee performance and the anticipation of potential employee litigation is addressed.
References
Azari-Rad, H., P. Philips, and M. Prus, The Economics of Prevailing Wage Laws. Ashgate (2005). Decker, K., Family and Medical Leave in a Nutshell. West Publishing (2000). Guerin, L. and A. Delpo, Essential Guide to Federal Employment Laws, NOLO (2006). Hynes, J.D. and Lowenstein, Agency, Partnership, and the LLC in a Nutshell, 5th ed. West Publishing Co. (2012). 1-366
Covington, Robert N. and Seiner, Joseph A., Employment Law in a Nutshell, 4th ed., West Academic, 2017. Bennett-Alexander, Dawn and Hartman, Laura, Employment Law for Business 9th ed., McGraw-Hill (2019).
Teaching Outline
I. Employment Laws (LO 21-1) A. Minimum Wages and Maximum Hours Emphasize: The importance of the Fair Labor Standards Act (FLSA). The current minimum wage required by the FLSA. The establishment of the maximum length for a standard work week. The workings of overtime pay or, as an alternative, compensatory time. Sidebar 21.1—―Fair Labor Standards Act: To Pay or Not to Pay Overtime?‖ Sidebar 21.2—―Internship Programs under the FLSA‖ Table 21.1—―Summary of Major Federal Employment Laws‖ Case 21.1—Sandifer v. United States Steel Corp., 571 U.S. 220 (2014).‖ Sidebar 21.3—―Break Time for Nursing Moms‖ Case 21.2—Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. 1 (2011). B. The WARN Act Emphasize: The WARN notice is required of employers with 100 or more employees. The nature of the notice required when mass layoffs or plant closings are planned. The definition of a plant closing and a mass layoff. The 3-prong definition of the term loss of employment. Alternative scenarios where the WARN act should be applied. Additional Matters for Discussion: The penalty for failing to comply with WARN Act requirements. 1-367
When the WARN Act notice is not required: replacing striking workers, when business is failing, and impact of natural disasters
C. The Family and Medical Leave Act Emphasize: The 12-week period allowed for leave. The four events covered by FMLA to justify the leave. The length of time an employee must work before being covered by FMLA. Sidebar 21.4—―FMLA: Facts and Statistics‖ Sidebar 21.5—―EEOC: Best Practices Recommendations on Work/Family Balance‖ FMLA and Military Families Describe: The main function of the National Defense Authorization Act (FY 2010 NDAA). The branches of the defense forces covered by the act. The duration and nature of leave provided under the act. Additional Matters for Discussion: The responsibility of the employer under FMLA—providing notice to employees of their rights, maintaining the employee‘s position and pay so that no disadvantage occurs due to family or medical leave. The legal rights of employees to enforce FMLA in federal district court. Sidebar 21.6—―States Are Immune from FMLA Self-Care Claims‖ D. Uniformed Services Employment and Reemployment Rights Act Emphasize: The scope of reemployment rights. The health insurance provisions. Sidebar 21.7—―Rand Study: Invisible Wounds of War‖ Case 21.3—Staub v. Proctor Hospital, 562 U.S. 411 (2011). E. Occupational Safety and Health Administration Emphasize: OSHA‘s jurisdiction. The scope of OSHA. 1-368
That there is no private cause of action. Sidebar 21.8—―New OSHA Crowd Management Safety Guidelines‖ Sidebar 21.9—―OSHA‘s Severe Violator Enforcement Program‖
F. Pension Plans Emphasize: The role played by the following federal laws in securing employee or retiree interests: ERISA, COBRA, and HIPPA. Recent developments in corporations changing their retirement plans, usually from defined benefits to private individual accounts, such as 401(k) plans. G. Health Care Explain: The goals of the Patient Protection Affordable Care Act (Affordable Care Act) of 2010. The key features of the Affordable Care Act and what it includes. Sidebar 21.10—―Families First Coronavirus Response Act‖ H. Limitations on Employment at Will (LO 21-2) Explain: Historically, how limitations developed on the at-will doctrine. That these limitations are both statutory and common law imposed. How personnel handbooks can contain statements that courts imply to be contractually binding on employers. The three major employer behaviors that have been central to many contract and tort exceptions. Table 21.2—―Federal Statutes Limiting Employment-at-Will Doctrine‖ That the Dodd-Frank Wall Street Reform and Consumer Protection Act provides for incentives to whistleblowers for a broad range of violations. Sidebar 21.11—―IRS Whistleblowers Rewards Program‖ Additional Matter for Discussion: That many nations have much stricter laws promoting an employee‘s right to job security than does the United States. I. Workers’ Privacy (LO 21-3) Emphasize: 1-369
The protection offered to employees by the Electronic Communications Privacy Act of 1986 and the Employee Polygraph Protection Act of 1988. Penalties imposed by the labor department on violators of the act. The protection offered by the Fourth Amendment to public employees. Sidebar 21.12—―Privacy, Technology and Social Media‖ The issues of drug testing. How a number of states have placed some limits on a private company‘s right to test for drugs. Sidebar 21.13—―Is There Any Reasonable Expectation of Privacy in the Workplace?‖
Additional Matter for Discussion: The Dept. of Labor issued a final rule on the Employee Polygraph Protection Act of 1988. It allows testing when there is a ―reasonable suspicion‖ that the employee is involved in activity resulting in economic loss or injury to the employer. Also when the employer is a security-related firm or is involved with controlled substances. J. Workers’ Compensation Acts Discuss: The replacement of torts with compensatory laws. The clear purpose of compensatory statutes. History Emphasize: Workers‘ compensation laws are state statues designed to protect employees and their families from the risks of accidently industry, death, or disease resulting from their employment. How historically three defenses insulated employees from negligence liability in most instances. The System Discuss: How the state workers‘ compensation statutes provide a system to pay workers or their families in case of injuries or death of the employee. That workers‘ compensation is an insurance program administered exclusively by an administrative agency called a board. Tests for Determining Compensation 1-370
Explain: The tests for determining eligibility for compensation. Why courts interpret workers‘ compensation laws liberally to favor workers. Exclusive Remedy Rule Describe: The ―exclusive remedy rule‖ and its exceptions. Actions that are not covered under the Workers‘ Compensation Laws. The problems confronting the workers‘ compensation system. Why slowly developing occupational diseases is a growing concern. A possible solution to the problems confronting the workers‘ compensation system. The Future of State Workers’ Compensation Explain: Currently, many problems confront the state workers‘ compensation system. Fifty separate nonuniform acts make up the system. Many acts exclude from coverage groups such as farmworkers, government employees, and employees of small businesses. Many state legislatures have enacted changes in their compensation laws. In the last decade, workers‘ compensation payments have tripled. Many workers exaggerate their injuries to get compensation. At the same time, compensation payments to seriously injured workers are often inadequate.
Additional Matters for Discussion: An interesting handout-type article on New Zealand‘s no-fault compensation alternative to the tort litigation system is ―New Zealand System Holds Lesson for U.S.,‖ Business Insurance, January 14, 1985, p. 31. California is often pointed to by the business community as representing the worstcase state for worker compensation excess. The California Workers‘ Compensation Institute reports that during the 1980s appeals to the state Workers‘ Compensation Appeals Board increased 63 percent, and the litigation rate climbed from 25 percent of all claims to nearly 36 percent. According to a study by a Duke University economist—when workers‘ comp benefits are higher, wage levels on the average are lower. This indicates that employers are cutting costs in other areas when comp benefits rise; the rate at which comp claims are filed rises significantly when benefits rise; serious job-related injuries decrease when benefits increase; Experience rating systems that alter 1-371
employers‘ premiums according to their claim histories provide incentives for employer-provided safety. Cases for Discussion: 1.
A toxic level of polychlorinated biphenyls was spilled in the employer‘s mill. The employer ordered two employees to clean up the spill without protective clothing. They both acquired unsafe body levels of the PCBs. They sued the employer for battery and fraud. Held: It was held by CA9 that the claims fall within the intentional injury exception to Oregon‘s exclusive remedy rule. Gulden v. Crown Zellerbach Corp., 11/24/89.
2.
Female employers sued their employer for battery, intentional infliction of mental distress, and negligent hiring based on sexual harassment by co-workers. The trial court dismissed due to the Florida exclusive remedy rule. Held by the Florida Supreme Court: The exclusive remedy rule does not bar the suit. Byrd v. RichardsonGreenshields Securities, Inc., 10/26/89.
K. Employment Eligibility Verification Emphasize: That the IRCA requires the completion of a Form I-9 Employment Eligibility Verification form for each individual hired in the United States. That the citizens and noncitizens must complete the form. That the four types of supporting documentation required for Form I-9. The four categories of document abuse defined by the U.S. Citizen and Immigration Service. That employers must retain the completed Form I-9 for three years after the initial date of employment or one year after termination. Sidebar 21.14—―Arizona Law on Hiring Foreign Workers is Upheld.‖ E. Employee Lawsuits (LO 21-4) Emphasize: That the best protection against unfounded discrimination claims is a system of adequate documentation, often called the ―paper fortress.‖ A chronological record of unsatisfactory work performance is a very useful defense against unjustified lawsuits following discipline, denial of promotion, or discharge. Job descriptions, personnel manuals, and employee personnel files and how they help to 1-372
avoid unfounded discrimination claims. How effective codes of ethics can be used to help combat unfounded claims. Sidebar 21.15—―What Can Employers Do to Avoid Employment Litigation?‖
Answers to Review Questions and Problems
Employment Laws 1.
Minimum Wages and Maximum Hours a)
The federal law that establishes the minimum wage and the hours in a work week is the Fair Labor Standards Act (FLSA). b) Currently (2017), the Federal minimum wage is $7.25 per hour (although it is higher in some states) and the maximum number of hours per week is forty. c) An employee who works in excess of 40 hours per week is entitled to pay at 1½ times the hourly rate or to take off 1 1/2 hours for every hour of overtime. 2.
The WARN Act a)
Covered employers are those with 100 or more employees. Anyone working less than ½ time does not count in determining whether the employer has 100 or more employees. b) The WARN notice must be in writing. c) The WARN notice must be delivered at least 60 days prior to a plant closing or a mass layoff. d) The WARN notice must be delivered to all employees or their bargaining representative (union), to the state‘s dislocated worker unit, and to the elected chief officer of the local government. 3.
The Family and Medical Leave Act Suzanne‘s employer is required to grant her only 12 weeks of family medical leave during any 12-month period. Since Suzanne used 10 weeks during her pregnancy, she has only 2 weeks left. Of course, Suzanne could ask for additional time off, but granting additional time would be at the discretion of her employer. Another possibility is for Suzanne to go back to work and let her husband use his family medical leave to care for the baby for 12 weeks.
4.
Uniformed Services Employment and Reemployment Rights Act 1-373
Robert is protected by USERRA. He has reemployment rights and he should receive benefits (e.g., additional training, seniority) that would have been attained had he not been absent due to military services. 5.
Occupational Safety and Health Administration Larry can report the safety relations to his employer and to OSHA, requesting an investigation. If he is retaliated against, he can file a complaint with OSHA.
6.
Pension Plans and Health Care As the number of retirees grows, due to longer life expectancies and the ―boomer-baby‖ generation reaching retirement age, the financial obligation of company pension plans has begun to overwhelm a company‘s ability to remain solvent. This is due to a number of factors, including the miscalculation of the pension plan‘s earnings, the accounting errors in determining the obligation, or the actual underfunding of the plan. Taken together, a crisis has arisen.
7.
Limitations on Employment at Will Terry‘s best argument is that the promise in the employee‘s handbook creates an exception to the at-will employment doctrine. Therefore, if she decides to sue in a court of law, she may be allowed to quote the handbook. However, this does not guarantee a ruling in her favor.
8.
Workers’ Privacy The company has a legitimate business interest in protecting its employees from inappropriate e-mail messages. Once the company receives complaints about sexually explicit e-mails, it is required by law to investigate. The employees‘ expectation of privacy through the use of passwords and personal folders for e-mail does not outweigh the company‘s responsibility to enforce its e-mail policy. Garrity v. John Hancock Mutual Life Insurance Company, 2002 U.S. Dist. Lexis 8343 (D. Mass 2002).
9.
Workers’ Compensation Acts Yes. Workers‘ Compensation Acts protect workers whose injuries arise out of and in the course of employment in spite of other factors such as contributory negligence.
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10. Employment Eligibility Verification The IRCA requires verification and permits the use of a combination of documents specified by federal law. The use of a driver‘s license with a picture along with the social security card satisfies the federal law. Not everyone has a passport and citizens will not have green cards. Sophia‘s Glam Designs cannot discriminate against the worker who does not have a passport or a green card. Employee Lawsuits
11. The term ―paper fortress‖ refers to meticulously maintained records that include job descriptions, personnel manuals, and employee personnel files. 12. The employee personnel file should have all details related to job description, employer expectations, and policies listed. Therefore, upon termination of employment, the employer can have access to each detail about the terminated employee‘s performance and conduct. This document therefore acts as a barrier against unjustified employee lawsuits.
Business Discussion #1 1.
How is the workday calculated? The Fair Labor Standards Act and court cases interpreting this law define the workplace as beginning with the first principal activities and ending with the last. Activities such as punching in or out on a time clock are not considered principal activities. The FLSA also states that a standard workday consists of 8 hours spent working.
2.
What legal requirements have to be met before layoffs can occur? The WARN Act requires that employers notify employees and communities that may be impacted by mass layoffs or plant closings. This notice must be in writing and be delivered 60 days prior to the layoffs or closing.
3.
What is the company’s responsibility to educate workers about their rights under the FMLA? Employers are required to notify employees that they are eligible for family medical leave and designating in writing when the employee has requested leave. Employers should create 1-375
and disseminate an explanation of FMLA rights, perhaps through training and orientation and/or through provisions in the company handbook, as well as a policy addressing discrimination against caregivers. 4.
Can your company properly monitor its employees’ phone calls and e-mail messages? The Electronic Communications Privacy Act mandates that employers are not permitted to monitor employee telephone calls without the employee‘s consent or unless it is in the normal course of business when using company equipment. E-mail messages are not covered under the act and the employer has the right to monitor e-mail and computer usage regarding employees.
Chapter 22 Labor–Management Relationship Learning Objectives
The focus shifts to examine the right of workers to unionize and to the law of labor-management relations. In this chapter, students will examine, from a chronological perspective, Congress‘s various attempts to protect employees and to equalize the bargaining power of management and labor to enable collective bargaining. The National Labor Relations Board is the prime regulatory force in this area, and the chapter should familiarize students with both its strengths and weaknesses. This chapter will examine conduct that constitutes unfair labor practices by both employers and labor unions. Students should recognize that it is easy for either labor or management to commit an unfair labor practice. They should also be aware of the sanctions that are imposed for unfair labor practices.
References
Brody, D., Labor Embattled: History, Power, Rights. University of Illinois Press (2005). Estreicher, Samuel and Bodie, Matthew T., Labor Law, 2d (Concepts and Insights Series), Foundation Press, (2020). Twomey, David P., Labor and Employment Law, 15th ed., Cengage (2013). Dannin, E., Taking Back the Workers‘ Law: How to Fight the Assault on Labor Rights. ILR Press (2006). 1-376
Freeman, R., J. Hersch, and L. Mishel, Emerging Labor Market Institutions for the Twenty-First Century. University of Chicago Press (2005). Gorman, R. and M. Finkin, Gorman and Finkin‘s Hornbook on Labor Law – Unionization and Collective Bargaining, 2nd edition. West Publishing (2004). Law, G.T., A Guide to Sources of Information on the National Labor Relations Board. Routledge (2002). Lambert, J., ―If the Workers Took a Notion‖: The Right to Strike and American Political Development. ILR Press (2005). Leslie, D.L., Labor Law in a Nutshell, 5th ed. West Group (2008). Website: http://www.nlrb.gov
Teaching Outline
I. Labor Laws (LO 22-1) Emphasize: The need to unionize employees and the composition of a union. The historical data showing the workforce that is unionized. Sidebar 22.1— ―2019 Statistics on Union Membership‖ Table 22.1—―Statistics on Union Membership‖ Table 22.2—‖Federal Laws Governing Labor-Management Relations‖ A. Laws Before 1935 (LO 22-2) Emphasize: Congress‘s view on management in a labor–management relationship. The repercussions of trying to unionize in the last two centuries. The three ―prolabor‖ acts passed by Congress that were meant to curb employer mistreatment of employees. The Clayton Act Emphasize: That the first federal statue of any importance to the labor movement is the Clayton Act of 1914. That antitrust laws do not apply to labor unions that are carrying out legitimate labor activities such as striking and picketing. 1-377
Case for Discussion: 1.
A union and several employers negotiated a collective bargaining agreement which restricted the operating hours of food-store meat departments in Chicago, Illinois, to 9:00 a.m. through 6:00 p.m. Jewel Tea brought suit, alleging that a prepackaged, selfservice system of marketing meat eliminated the need to have a butcher on duty at all times; therefore, the limitation on operating hours was an unreasonable restraint of trade. The defendants claimed that the controversy was exempt from the antitrust laws. Issue: Does the antitrust laws apply? Held: No. Exempt under the Clayton Act. The national labor policy expressed in the National Labor Relations Act immunizes from the Sherman Act union-employer agreements on when, and how long, employees must work. The agreement herein is thus exempt. Local Union No. 189, Amalgamated Meat Cutters, and Butcher Workmen of North America, AFL-CIO, et al. v. Jewel Tea Company, Inc., 85 S.Ct. 1596 (1965).
The Railway Labor Act Explain: That in 1926, Congress enacted the Railway Labor Act to encourage collective bargaining in the railroad industry. That the National Mediation Board, a three-member board, that has a bargaining representative for any bargaining unit of employees in the railway or air transport industries. That if no agreement is reached, then the process moves onto arbitration. Therefore, after a sixty day period, lockouts by management and strikes by workers become legal under this law. Cases for Discussion: 1.
Norris was terminated by Hawaiian Airlines as an aircraft mechanic. Norris had refused to sign a maintenance record on a plane he felt was unsafe to fly. He reported his concerns to the Federal Aviation Administration. After being fired, Norris filed a wrongful discharge suit in the Hawaiian state courts. Hawaiian Airlines moved to dismiss Norris‘s complaint on the grounds that the Railway Labor Act preempted this state-based action and required arbitration of this dispute.
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Issue: Does the Railway Act preempt the Hawaiian-based lawsuit and require that Norris submit his grievance to arbitration? Held: No. The disputes required by the Railway Labor Act to be submitted to arbitration are those that arise out of the collective bargaining agreement. A state-law cause of action is not preempted if it involves rights and obligations that exist independent of the collective bargaining agreement. The claim of wrongful discharge is such an independent cause of action that it is not preempted. Hawaiian Airlines, Inc. v. Norris, 114 S.Ct. 2239 (1994). 2.
TWA informed its flight attendants before and during a strike that any vacancies created by the strike would be filled through hiring of permanent replacements, rehiring of ―crossover‖ employees, and application of the existing seniority bidding system under which the most senior workers get their choice of assignments—and that such job assignments would remain effective after the strike ended. Thus, after the strike, senior full-term strikers would not be permitted to displace new hires or junior crossovers and could be left out of work. Issue: Can striking employees be permanently replaced? Held: Yes. Neither the Railway Labor Act nor any analogy to the National Labor Relations Act bars an employer from refusing to reinstate strikers to jobs occupied by less senior employees who crossed the picket line. Such a policy is a legitimate economic weapon for employers during a period of self-help once the RLA‘s private dispute resolution mechanisms are exhausted. Employees have a right not to strike. Trans World Airlines v. Independent Federation of Flight Attendants, 109 S.Ct. 1358 (1989).
3.
A collective-bargaining agreement required that all of the airline‘s clerical employees join the union or pay agency fees equal to members‘ dues. Plaintiffs objected to the use of their compelled dues or fees for certain union activities. The union adopted a rebate program under which objecting employees were ultimately reimbursed for their shares of political expenditures but collected from objecting employees for expenses for (1) the national union‘s quadrennial Grand Lodge convention, (2) litigation not involving the negotiation of agreements or settlements of grievances, (3) union publications, (4) social activities, and (5) general organizing efforts. Issue: May the members‘ dues be used for these purposes? Held: The non-union members‘ money could not be spent on (2), (5), and part of (3). A union cannot be allowed to commit dissenters‘ funds to improper uses even 1-379
temporarily. The law eliminates ―free riders,‖ but when employees object to being burdened with particular union expenditures, the test must be whether the challenged expenditures are necessarily or reasonably incurred for the purpose of performing the duties of an exclusive representative of the employees in dealing with the employer on labor-management issues. Ellis v. Broth. of Ry., Airline and S.S. Clerks, 104 S.Ct. 1883 (1984). The Norris-LaGuardia Act Emphasize: That the Norris-LaGuardia Act attempts to limit the power of the federal courts to issue injunctions. That although the act does greatly restrict state courts from issuing injunctions, it does not prohibit them altogether. Case for Discussion: 1.
A Union, which represents railroad employees nationwide, had a dispute over renewal of a collective-bargaining agreement with a small railroad that is a subsidiary of a large railroad. After exhausting the settlement procedures mandated by RLA, the Union instituted a lawful strike against the parent railroads. The Union extended its picketing to other railroads with which the parent interchanged traffic. Issue: Can the court enjoin this secondary picketing? Held: No. Under the Norris-LaGuardia Act, a federal court did not have the jurisdiction to enjoin secondary picketing in railway labor cases. Burlington Northern R. Co. v. B.M.W.E., 107 S.Ct. 1841 (1987).
II. The Wagner Act (LO 22-3) Emphasize: The historical time frame in which the Wagner Act was passed. Section 7 rights of employees and what it states. Sidebar 22.2—―Three Executive Orders Impacting Unions‖ Case for Discussion: 1.
A union refused to work overtime during negotiations for renewal of a contract. The employer filed a complaint with a state employment relations commission that entered a 1-380
cease and desist order. The state courts upheld the order. Issue: Does the state have jurisdiction over this labor dispute? Held: No. The union‘s concerted refusal to work overtime was peaceful conduct constituting activity that must be free of state regulation if the congressional intent in enacting the comprehensive federal law of labor relations was not to be frustrated. Lodge 76, Etc. v. Wisconsin Employment Rel. Com’n., 96 S.Ct. 2548 (1976). A. The National Labor Relations Board Emphasize: That the National Labor Relations Board (NLRB) operates as an independent agency of the U.S. government. The NLRB‘s authority to certify unions as the collective bargaining representative of employees. NLRB Organization Describe: The organization and functions of the NLRB and the role of the general counsel of the board. Administrative law judges are responsible for the initial conduct of hearings in unfair labor practice cases. Jurisdiction Explain: The category of personnel who are exempted from NLRB. That the NLRB cannot exercise its powers over all business because it has a limited budget and time constraints. Sidebar 22.3—‖Are College Football Players Employees?‖ Case 22.1—Hispanics United Of Buffalo, Inc. and Carlos Ortiz, Case 03-CA-027872 (2012) Quasi-Judicial Authority Describe: The broad scope that an order by the NLRB can have to remedy the effects of an unfair labor practice after it finds that one has occurred. 1-381
That the NLRB has the power to order whatever action is necessary to correct the unlawful practice.
Cases for Discussion: 1.
The NLRB adopted a general rule that there would be eight and only eight defined employee units for collective bargaining in acute case hospitals. The American Hospital Assn. contended that the law requires the NLRB to make a separate bargaining unit determination in each case and to avoid proliferation of units. Issue: Is the NLRB rule valid? Held: Yes. The ―in each case‖ requirement is simply to indicate that whenever there is a disagreement between employers and employees about the appropriateness of a bargaining unit, the Board shall resolve the dispute. In doing so, the Board is entitled to rely on rules that it has developed to resolve certain issues of general applicability. The rule is not arbitrary and capricious. American Hospital Assn. v. NLRB, 111 S.Ct. 1539 (1991).
2.
An action was instituted by a union for relief against certain prohibitions contained in the New Jersey Casino Control Act. Issue: Is the New Jersey act applicable? Held: Yes. No preemption by the NLRA. New Jersey‘s regulation of the qualifications of casino union officials does not conflict with the NLRA. Brown v. Hotel & Restaurant Employees & Bartenders, 104 S.Ct. 3179 (1984).
3.
An employer was sued for misrepresentation and breach of contract by strike replacements who were displaced by reinstated strikers. The strike replacements had been offered and accepted jobs on a permanent basis and had been assured that they would not be fired to accommodate returning strikers. Issue: Do the strike replacements have a cause of action? Held: Yes. The displaced strike replacements may sue. The causes of action for misrepresentation and breach of contract are not preempted by the NLRA. Belknap v. Hale, 103 S.Ct. 3172 (1983).
B. Certification of Unions 1-382
Emphasize: That an employer may voluntarily recognize that its workers want to have a certain labor union represent them. More common is the NLRB‘s certification of a union as the bargaining agent for a group of employees. Sidebar 22.4—―Limitation on NLRB‘s Remedies‖ Certification Elections Emphasize: Elections are by secret ballot and are supervised by the NLRB. The procedures for filing for both certifying and decertifying elections. Certification through Cards Emphasize: Cards may substitute for an election if certain conditions are met. The cards must be unequivocal and clearly indicate that the employee signing the card is authorizing the union to represent him or her. Cases for Discussion: 1.
Auciello Iron Works had 23 production and maintenance employees. After a union election in 1977, the NLRB certified Shopmen‘s Local No. 501, a/w International Association of Bridge, Structural, and Ornamental Iron Workers, AFL-CIO, as the collective-bargaining representative of Auciello‘s employees. Over the following years, the company and the Union were able to negotiate a series of collectivebargaining agreements, one of which expired on September 25, 1988. Negotiations for a new one were unsuccessful throughout September and October 1988. When Auciello and the Union had not made a new contract by October 1988, the employees went on strike. Negotiations continued and on November 17, 1988, Auciello presented the Union with a complete contract proposal. On November 18, 1988, the picketing stopped, and nine days later, on a Sunday evening, the Union telegraphed its acceptance of the outstanding offer. The very next day, however, Auciello told the Union that it doubted that a majority of the bargaining unit‘s employees supported the Union, and for that reason disavowed the collectivebargaining agreement and denied it had any duty to continue negotiating. Auciello traced its doubt to knowledge acquired before the Union accepted the contract offer, including the facts that 9 employees had crossed the picket line, that 13 employees 1-383
had given it signed forms indicating their resignation from the Union, and that 16 had expressed dissatisfaction with the Union. In January 1989, the NLRB‘s General Counsel issued an administrative complaint charging Auciello with violation of §§ 8(a)(1) and (5) of the NLRA. An administrative law judge found that a contract existed between the parties and that Auciello‘s withdrawal from it violated the Act. The Board affirmed the administrative law judge‘s decision; it treated Auciello‘s claim of good-faith doubt as irrelevant and ordered Auciello to reduce the collectivebargaining agreement to a formal written instrument. The Court of Appeals enforced the Board‘s order. Issue: Assuming Auciello has good-faith reasons to question its employees‘ support of the union, can Auciello refuse to bargain with the union under the terms of a collective bargaining agreement? Held: No. The NLRB‘s decision is consistent with the statute‘s intended protection. The NLRB‘s interpretation is consistent with the statute‘s purpose to assure that employees can organize for the mutual aid of one another and can enter into the collective-bargaining process. The 1947 Taft-Hartley Act recognizes that an employee might also be paid by a union for work done on behalf of the union. Auciello is obligated to bargain with the union during the term of a collectivebargaining agreement. Since Auciello refused to bargain, it committed an unfair labor practice. Auciello Iron Works, Inc. v. Labor Relations Board, 116 S.Ct. 1754 (1996). 2.
Sterlingwale laid off all of its production employees in February 1982, and went out of business in late summer. Fall River acquired Sterlingwale‘s plant, real property, equipment, and some of its remaining inventory, and began operating out of Sterlingwale‘s former facilities and hiring employees in September 1982. In October 1982, the union that had represented Sterlingwale‘s production and maintenance employees for almost thirty years requested Fall River to recognize it as the bargaining agent for its employees and begin collective bargaining. Fall River refused even though a majority of its employees were ex-Sterlingwale employees. Issue: Is Fall River obligated to bargain with the union? Held: Yes. Fall River is required to bargain with the union that represents its predecessor‘s employees. The general rule is that a new employer that succeeds to another‘s business has an obligation to bargain with the union that represents the predecessor‘s employees. Fall River Dyeing & Finishing Corp. v. National Labor Relations Board, 107 S.Ct. 2225 (1987). 1-384
3.
The members of an independent local union voted to affiliate with an international union. The employer refused to bargain with the new entity. The NLRB decided that because non-union employees were not allowed to vote in the affiliation election, the election did not meet minimal due process standards and was therefore invalid. Issue: Did the NLRB exceed its authority? Held: Yes. The act balances the employees‘ rights to select a bargaining representative against the concern for stable bargaining relationships by authorizing the board to conduct a representation election ―only where affiliation raises a question of representation.‖ The board‘s ruling effectively decertified the reorganized union where the affiliation raised no question of representation and the Board interfered in union decision making. N.L.R.B. v. Financial Inst. Employees, 106 S.Ct. 1007 (1986).
Additional Resource See the NLRB‘s homepage—http://www.nlrb.gov C. Unfair Labor Practices by Management Emphasize: Why Congress perceived the need for unfair labor practices by management. What constitutes an unfair labor practices by management. Sidebar 22.5—―An Historic Vote to Unionize at Kickstarter‖ Interfering with Unionization Emphasize: The disjunctive nature of the first unfair labor practice. The first half refers to interference with efforts ―to form, join or assist labor organizations.‖ The second half refers to interference with employees‘ concerted activities. The various ways employers can use scare tactics or threats to interfere with the efforts to form, join, or assist a labor organization. That a conferral of benefits on employees can be an unfair labor practice. The temptation to use work rules to discourage unionization. Cases for Discussion: 1.
Town & Country Electric, Inc., a nonunion electrical contractor, wanted to hire 1-385
several licensed Minnesota electricians for construction work. Through an employment agency, Town & Country advertised for job applicants. It refused to interview 10 of 11 union applicants who responded to the advertisement. Its employment agency hired the one union applicant whom Town & Country interviewed, but he was dismissed after only a few days on the job. The members of the Union filed a complaint with the National Labor Relations Board claiming that Town & Country and the employment agency had refused to interview or retain them because of their union membership. An administrative law judge ruled in favor of the Union members, and the Board affirmed that ruling. Issue: Can a worker be a company‘s ―employee,‖ within the terms of the National Labor Relations Act if, at the same time, a union pays that worker to help the union organize the company? Held: Yes. The National Labor Relations Act clearly states that ―employees‖ are to be allowed to come to the mutual aid of other employees and to engage in the collective-bargaining process. The 1947 amendments recognize that a company may pay a union employee if such person is also an employee of the company. Thus, these applicants were employees and entitled to Town & Country‘s compliance with fair labor practices. National Labor Relations Board v. Town & Country Electric, Inc., 116 S.Ct. 450 (1995). 2.
A shopping plaza owner barred union organizers who weren‘t store employees from distributing handbills in the plaza‘s public parking lot. Issue: An unfair labor practice? Held: No. An employer can‘t be forced to allow nonemployee organizers onto its property. Nonemployee organizers may enter company property only in the rare case where employees are so inaccessible that ―reasonable attempts‖ to reach them ―through the usual channels‖ aren‘t available to union recruiters. Note: One of Justice Thomas‘s first opinions. Lechmere Inc. v. N.L.R.B., 112 S.Ct. 841 (1992).
3.
Helton, a waitress at Johnson‘s restaurant, filed unfair labor practice charges with the NLRB, alleging that she had been fired because of her efforts to organize a union. Later, Helton and other waitresses picketed the restaurant and distributed leaflets. The restaurant then filed a suit for damages against Helton and other demonstrators in an Arizona state court alleging harassment and libel. On the following day, Helton filed a second charge with the NLRB, alleging that the civil suit was filed in retaliation for the defendant‘s protected, concerted activities and filing of charges 1-386
with the NLRB. Issue: Is the lawsuit an unfair labor practice? Held: No. The NLRB may not halt the prosecution of a state court lawsuit, regardless of the plaintiff‘s motive, unless the suit lacks a reasonable basis in fact or law. Retaliatory motive and lack of reasonable basis are both essential prerequisites to the issuance of a cease and desist order against a state suit. Bill Johnson‘s Restaurants, Inc. v. N.L.R.B., 103 S.Ct. 2161 (1983). 4.
Employees refused to cross a picket line connected with a union‘s organizational campaign. They were discharged prior to the time their places were filled for failing to report to work. Issue: Is this discharge an unfair labor practice? Held: Yes. The discharges constituted unfair labor practices regardless of whether or not the employees were economic strikers or unfair labor practice strikers. N.L.R.B. v. International Van Lines, 93 S.Ct. 74 (1972).
5.
An employer refused to pay vacation benefits to employees who had been on strike on a certain date. Issue: Is this refusal an unfair labor practice? Held: Yes. This was ―discrimination‖ that was capable of ―discouraging membership in a labor organization‖ and an unfair labor practice even though no ulterior motive by the employer was shown. N.L.R.B. v. Great Dane Trailers, Inc., 87 S.Ct. 1972 (1967).
Additional Matters for Discussion: That a violation of the concerted activities provision does not have to involve a union. It protects employees acting for mutual aid and protection. That employer rules prohibiting solicitation during ―working time‖ are presumptively valid. Rules banning solicitation during ―working hours‖ are presumptively invalid. That an employee‘s preparation to testify under subpoena at trial of union activist charged by employer with criminal wrongdoing constitutes concerted activity, which cannot be interfered with by the employer. Interfering with Concerted Activities 1-387
Emphasize: That the term concerted activity is given a liberal interpretation in order to create a climate that encourages unionization, collective bargaining, and all that may flow from such activity. That the concerted-activity concept is quite extensive. The right to engage in concerted activity has been expanded to cover the actions of a sole employee under certain circumstances. Dominating a Labor Organization Emphasize: The second unfair labor practice prohibits the domination of a labor organization by employers or their contribution of financial or other support to any union. Under the Wagner Act, any organization of employees must be completely independent of their employers. Discriminating Based on Union Affiliation Emphasize: That the third labor practice, an employer may neither discharge nor refuse to hire an employee to either encourage or discourage membership in any labor organization. The law does not oblige an employer to favor union members in hiring employees. That a company may not go partially out of business because some of its employees have organized, nor many it temporarily close the portion of its business that has unionized. Case for Discussion: 1.
Company‘s bargaining agreement with employees contained a no-strike clause. However, there was no provision in the contract requiring union officials to prevent illegal work stoppages. On two previous occasions, arbitrators had ruled in the company‘s favor when resolving illegal work stoppages. When union members and leaders refused to cross a picket line (established by a different union), the company suspended employees who were union members for five to ten days. The employees who were union leaders were suspended for 25 days. Issue: Is the company‘s action an unfair labor practice? Held: Yes. The company‘s action violated Section 8(a)(3) of the NLRA. To justify 1-388
the more severe punishment imposed upon union leaders, there must be an affirmative duty that these leaders prevent illegal work stoppages. Since the contract contained no such duty, the company‘s action was discriminatory on the basis of an employee‘s union activity. Previous rulings by arbitrators in the company‘s favor do not implicitly impose this affirmative duty on union leaders. Metropolitan Edison Company v. National Labor Relations Board, 103 S.Ct. 1467 (1983). Discriminating as a Result of NLRB Proceedings Emphasize: How difficult it is to prove what motivated an employer to pursue a particular course of action. That many cases that violate this unfair labor practice also involve a violation of at least one other unfair labor practice. Refusing to Bargain in Good Faith Emphasize: That the act imposes an affirmative duty to bargain in good faith but does not clearly define what good faith means. That the process requires each side to have adequate information to function efficiently so a duty to disclose relevant information has been placed on the employer. Sidebar 22.6—―This Was No Joke: The Writers Guild of America Strike‖ Sidebar 22.7—―Fired! Venting About the Boss on Facebook‖ Case for Discussion: 1.
Ford has the contractual right to review the prices and quality of an in-plant cafeteria and vending-machine service provided by an independent company. The union wanted to negotiate over proposed increases in prices by the vendor, and Ford refused. The NLRB found this a violation of the duty to bargain in good faith. Issue: Is this a compulsory bargaining issue? Held: Yes. The Board‘s view should be given considerable deference. Courts will not reverse the NLRB if its determination is not unreasonable or based upon an unprincipled construction of the facts. Requiring bargaining over the issue leads to peace and not disorder. Because eating and the availability of food is a major consideration of the employee conditions, it is within the employment relationship. If disputes over food prices are likely to be frequent and intense, it follows that more, 1-389
not less, collective bargaining is the remedy. Ford Motor Company v. NLRB, 99 S.Ct. 1842 (1979). Additional Matters for Discussion: That an employer is able to make economic decisions unrelated to employment free from the constraints of the bargaining table, especially when such decisions are essential to the running of a profitable business. In order to accommodate both the employer‘s need for unencumbered decision-making and the employee‘s interest in job security, the test to balance these interests is: Bargaining over management decisions that have a substantial impact on the continued availability of employment should be required if the benefit, for labor-management relations and the collective bargaining process, outweighs the burden placed on the conduct of the business. III. The Taft-Hartley Act (LO 22-4) Emphasize: The historical perspective of the Taft-Hartley Act: the crippling strikes after the end of World War II and the widespread feeling developed that the balance of bargaining power had shifted to unions. A. Eighty-Day Cooling-Off Period Emphasize: The use of the eighty-day cooling-off period. A good historical example is a typical coal miners‘ strike. That the President must be willing to enforce the injunction with fines and jail sentences if necessary. President Carter was unwilling to do so and the law did not work when he attempted to stop a miners‘ strike. The role of the Federal Mediation and Conciliation Service. Additional Matter for Discussion: A court imposes an injunction for 80 days and orders workers on strike to go back to work. Most do not return and those that do, refuse to do much work when on the job. What happens next? B. Free Speech Emphasize: Section 8(c) of the act. Sidebar 22.8—―Tweeting His Way to Termination‖ 1-390
That historically the employer once had to be totally neutral. Now the employee can state his or her opinion but cannot make a threat or promise of benefit. The connection between this section and Section 8(a)(1). Examples of how stepping over the line will result in an unfair labor practice.
Additional Matters for Discussion: How does one avoid having a statement against unionization be perceived as a threat or a promise? One should use neutral statements such as: o I wouldn‘t vote for a union if I were voting. o Use your head and analyze the pros and cons. o It‘s up to you and the other workers to decide. The law prohibits management from making threats or promises. Sidebar 22.9—―Restricting Workplace Speech: Setting the Parameters‖ C. Union Shop—Membership and Fees Emphasize: The Wagner Act‘s strong support of unionization gave unintended bargaining power to unions with respect to an employer‘s hiring practices. That there are situations where to apply for a prospective job one has to join the union and this is referred to as closed shops. That one of the major changes brought about by the Taft-Hartley Act was the outlawing of the closed shops. However, this act still permitted the union shop. That in a union shop contract, also known as union security clause, the employer agrees that after an employee is hired that employee must join the union as a condition of continued employment; this is prohibited until the thirtieth day of employment begins. That the right-to-work laws prohibit agreements requiring membership in a labor organization as a condition of continued employment of a person who was not in the union when hired. D. Suits Against Unions Emphasize: That most suits are by members alleging a breach of the duty of fair representation. In such cases, an employee must prove employer‘s breach of collective bargaining agreement as an element of a cause of action under § 301 of Labor Management Relations Act against the union for breach of duty of fair representation. That there is a right to a jury trial in suits against a union for breach of the duty of fair representation. Sidebar 22.10—―Making a Point: Union Protests with a Giant Rat‖ 1-391
Cases for Discussion: 1.
The Pilots Union negotiated a back-to-work agreement that permitted the airline to treat striking pilots and non-striking differently. The striking pilots sued the union for a breach of the duty of fair representation. They challenged as a bad bargain the union settlement that gave them the option of participating in the airline‘s system for allocating vacant positions, electing not to return to work and receiving severance pay, or retaining their individual claims and becoming eligible to return to work only after all the settling pilots had been reinstated. Issue: Did the union breach its duty? Held: No. A union does not breach the duty of fair representation unless its actions are ―arbitrary, discriminatory, or in bad faith.‖ Union action is arbitrary only if it is so far outside a ―wide range of reasonableness‖ as to be ―irrational.‖ Even if the settlement was bad, it was by no means irrational. Air Line Pilots v. O‘Neill, 111 S.Ct. 1127 (1991).
2.
A state wrongful death suit was filed against the Deceased Miners Union on a theory of negligence in connection with nine safety inspections. Issue: Are tort claims in state court preempted by § 301 of Taft-Hartley? Held: Yes. The claim cannot be described as independent of the collective-bargaining agreement, since the Union‘s representatives were participating in the inspection process pursuant to that agreement‘s provisions. Thus, if the Union failed to perform a duty in connection with the inspection, it was a duty arising out of the agreement signed by the Union as the miners‘ bargaining agent, not a duty of reasonable care owed to every person in society. Pre-emption by federal law cannot be avoided by characterizing the Union‘s negligence as a state-law tort. As a result, the Union is not subject to suit under § 301. Negligence is not a breach of the duty of fair representation. United Steelworkers of America, AFL-CIO-CLC v. Rawson et al., 110 S.Ct. 1904 (1990).
3.
An employee sued his union for failing to represent him in a dispute with the employer. In his federal court case, he sought a trial by jury. Issue: Is he entitled to one? Held: Yes. The remedy is more legal than equitable. Money damages is ordinarily a 1-392
legal remedy. Moreover, back pay sought is not restitutionary. Local No. 391 v. Terry, 110 S.Ct. 1339 (1990). 4.
An employee was forced to leave work because of poor health. He recuperated and tried to return to work, but the company found his health inadequate and laid him off. The union pressed a grievance, but when the union‘s independent doctor found the employee‘s health inadequate, the union dropped the grievance. Issue: Has the union properly represented this member? Held: Yes. There is no violation of the duty of fair representation. The standard is that the union‘s actions must not have been arbitrary, discriminatory, or in bad faith, and the union‘s actions could not be characterized as any of these. An employee has no right, other than that given to him in the contract, to compel processing a grievance. Yet a union cannot arbitrarily ignore a meritorious grievance or process it in a perfunctory manner. The appropriate remedy depends on the circumstances. Vaca v. Sipes, 87 S.Ct. 903 (1967).
E. Unfair Labor Practices by Unions Emphasize: The six unfair labor practices. The relationship between unfair labor practice No. 2 and right-to-work laws. That a union‘s threat to strike in violation of a collective bargaining agreement constitutes an enjoinable unfair labor practice. Giving such items as union jackets and free drinks at the place of election are unfair labor practices. How difficult it is to distinguish between informational and recognitional picketing. Case for Discussion: 1.
A union went on strike when its contract with employers expired. Two of its members (Schous and Choate) were supervisors and continued to work. The union fined Schous $8,200 and Choate $6,000 for violating its constitution. The violations involved working for employers that did not have a collective-bargaining agreement with the union. The employers filed unfair labor practice charges alleging that the union restrained and coerced the employer in the selection of his representatives for the purposes of collective bargaining or the adjustment of grievances. The two supervisors were not directly involved in collective bargaining or in the grievance procedures, although they could be so involved in the future. 1-393
Issue: Has the union committed an unfair labor practice? Held: No. Union discipline of a supervisor member is prohibited only when that member engages in collective bargaining, grievance adjustment, or some other closely related activity such as contract interpretation. The general impact of union discipline on the supervisor‘s loyalty to the employer is insufficient to be an unfair labor practice. An employer is not restrained or coerced in the selection of its representatives because a union member must accept union expulsion or other discipline to continue in a supervisory position. Since union members have a right to resign from a union at any time and avoid imposition of union discipline, the employer may require that its representatives leave the union. N.L.R.B. v. Intern. Broth. of Elec. Workers, Local 340, 107 S.Ct. 2002 (1987). Restraining or Coercing an Employee into Joining a Union Emphasize: That unfair labor practice includes misconduct by unions directed toward employees. That the law makes it illegal for a union to restrain or coerce employees in the exercise of the rights of their rights to bargain collectively, just as it is in an unfair labor practice by employers in the exercise of their rights to bargain collectively, just as it is an unfair labor practice by employers to interfere with the same rights. Causing an Employer to Discriminate against a Nonunion Member Emphasize: That if a legal union shop agreement is in effect, a labor organization may insist that the employer observes its terms. That even when a legal union shop contract is in effect, the law prohibits a union from attempting to cause an employer to discriminate against an employee who has been denied membership or had his membership terminated for some reason other than the failure to pay dues and initiation fees uniformly required of all members. Striking or Picketing for Illegal Purposes or Engaging in Secondary Boycotts Emphasize: That judicial strikes are unfair labor practices. A jurisdictional strike is used to force an employer to assign work to employees in one craft union rather than another.
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F. Amendments Emphasize: Why picketing is prohibited in certain situations. Why the Congress passed the Landrum-Griffin Act or Labor-Management Reporting and Disclosure Act (LMRDA). Agreeing to Engage in a Secondary Boycott Emphasize: The difference between a ―hot cargo‖ contract and a secondary boycott. Why forbidding secondary boycotts is consistent with national policy. Picketing When Not Certified Emphasize: That in certain cases it is illegal for unions to force an employer to recognize or bargain with the union if it is not currently certified as the duly authorized collective bargaining representatives.
Answers to Review Questions and Problems
Labor Laws
1.
Law Before 1935 a.
b.
The Clayton Act exempted union activities from the antitrust laws; the Railway Labor Act supports unionization in the transportation industries (originally only in the railroad industry); and the Norris-LaGuardia Act restricted the use of the injunction to hinder union activity as well as outlawing yellow-dog contracts. These laws did not explicitly recognize a worker‘s right to join a union. Also, the economic conditions before 1935 did not favor strong employee-focused activities. Many people were happy to have any job.
The Wagner Act
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2.
National Labor Relations Board The jurisdiction of the NLRB is broadly stated as applying to any business affecting commerce. There are a number of exemptions that reduce the scope of the NLRB‘s jurisdiction. These exemptions are listed on page 691 of the text.
3.
Certification of Unions Yes. Confusion over the meaning and purpose of a ―recognition slip‖ may cause an employee to think he or she has agreed to vote for the union as a bargaining agent. Since the vote was so close, even one employee changing a vote for the union to a vote against the union changes the outcome of the certification election. NLRB v. Savair Manufacturing Co., 94 S.Ct. 495 (1973).
4.
Unfair Labor Practices by Management a.
b.
The five unfair labor practices defined in the Wagner Act are: interfering with union activities; dominating a labor union; discriminating based on union affiliation; discriminating as a result of NLRB proceedings; and refusing to bargain in good faith. Examples given by students will vary.
The Taft-Hartley Act
5.
Eighty-Day Cooling-Off Period a. b.
6.
The president can invoke the provision of the Taft-Hartley Act only when the national health or safety is at stake. The president appoints a board of inquiry. This board investigates the labor work stoppage and reports to the president. If the nation‘s health or safety is adversely impacted, through the attorney general, the president seeks a court order enjoining the work stoppage for 80 days. During this period, labor and management are encouraged to resolve their differences.
Free Speech The Personnel Director‘s speech should contain no statements that could be construed as a promise of benefits if the union is rejected or a threat of reprisal or force if it is voted in. Words must be very carefully chosen or an unfair labor practice will be committed. 1-396
7.
Union Shop—Memberships and Fees No. If non-union members are required to pay dues, § 14(b) of the Taft-Hartley Act would have little or no meaning. It would be a violation of § 14(b) to require the payment of dues or their equivalent.
8.
Suits against Unions Yes. Ed has rights against his union for breach of its duty of fair representation, which the courts have implied from the union‘s legal status as the exclusive representative of all employees in the bargaining unit. A breach of this duty occurs when a union‘s conduct is arbitrary, discriminatory, or in bad faith. Here, the union arbitrarily ignored Ed‘s meritorious grievance and carelessly failed to process it at all.
9.
Unfair Labor Practices by Unions a.
b.
The six unfair labor practices defined in the Taft-Hartley Act are: coercing an employee to join a union or the employer in selecting representatives; causing or attempting to cause an employer to discriminate against an employee who is not a union member unless there is a legal union shop agreement; refusing to bargain with the employer if it is a designated NLRB representative; striking, picketing, or engaging in secondary boycotts for illegal purposes; charging new members excessive or discriminating initiation fees in a union shop; and causing an employer to pay for work not performed. Examples given by students will vary.
10. Amendments a.
b.
Congress had three purposes for passing the Landrum-Griffin Act. These are (1) assuring union members of basic rights, (2) regulating the internal operations of unions through reporting requirements, and (3) amending the unfair labor practices. The impact of adding unfair labor practices was to make it clear that unions and employers can‘t conspire to engage in secondary boycotts and to prohibit picketing under special circumstances.
Business Discussion #1 If the workforce is unionized, the company must bargain in good faith over all mandatory bargaining issues. Such issues are those related to wages, hours, and other terms or conditions of employment. 1-397
1.
Is a Christmas gift still purely a management decision? No. Wages or compensation is a compulsory bargaining issue for businesses that are unionized. Annual Christmas gifts are a part of wages since the employees expect them.
2.
Are you in trouble if you cancel the turkeys? Yes. One has committed an unfair labor practice unless the union agrees to the cancellation.
3.
What is the union’s role in the decision? To bargain with the company and to participate in the decision.
Business Discussion #2 1.
What potential claims could Sarah assert against her employer? This policy is illegal. The NLRB has determined that employees have the right to discuss workplace conditions which include salaries whether within the company or as part of a concerted activity. Sarah also may have Title VII gender discrimination and Equal Pay Act claims as well as an FLSA anti-retaliation claim.
2.
What defenses should the employer raise? The employer can try to argue that the positions are not substantially similar and/or Bill negotiated a higher salary, whereas Sarah had not.
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